Meltdown Avoided: Intel Rediscovers Profitability

After racking up $3.5 billion in losses over the past two quarters, Intel managed to stanch the bleeding and return to profitability in the second quarter.

The x86 giant managed to extract $1.5 billion in profit from $12.9 billion in revenues during the three months to July 1, sending its share price up eight percent in after-hours trading on Thursday. But while the Xeon processor giant's second quarter of 2023 came in above expectations, those revenues were still down 15 percent from the year prior. That said, the latest quarter represents a notable improvement from the $2.8 billion loss and 30 percent drop in year-over-year revenues Chipzilla experienced last quarter, and that $700 million loss in the quarter before that. It also recorded a $500 million loss in the second quarter of last year.

"It was a very good quarter, we exceeded expectations on top line, on bottom line, we raised guidance, and we look forward to the continued opportunities that we have of accelerating our business and seeing the margin improvement that comes in the second half of the year," CEO Pat Gelsinger said on Thursday's earnings call with analysts.

Gelsinger credited heightened confidence in Intel's product roadmap, the strength of its client and datacenter groups, as well as cost savings measures, for the return to profitability during the quarter.

Speaking of cost-cutting measures, Gelsinger said the business was on track to achieve its goal of axing annual spending by $3 billion in 2023 and $8 billion to $10 billion by 2025. The latest of these cuts saw it kill off its NUC mini PC division.

Despite these measures, CFO David Zinsner cautioned Wall Street that the chipmaker hadn't yet reached the end of its road to recovery. "While we expect continued improvement to global macroeconomic conditions, the pace of recovery remains moderate," he said.

And this was plain to see across the giant's numerous business units, which – with the exception of Intel Foundry Services (IFS), the small contract manufacturing arm – saw declining revenues during the quarter.

Among the hardest hit this quarter was the Networking and Edge Product group, which clocked a 38 percent decline in revenues at $1.4 billion in Q2.

"Network and edge markets are slowly working through elevated inventory levels elongated by sluggish China recovery, and telcos have delayed infrastructure investment due to macro uncertainty," Zinsner said. "We see demand remaining weak through at least the third quarter."

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Intel's Datacenter and AI (DCIA) and Client Computing Group (CCG) fared better, but still saw revenues decline 15 percent and 12 percent year over year to $4 billion and $6.8 billion, respectively.

In contrast to last quarter, the future is looking good for the pair. CCG revenues grew $1 billion sequentially, spurred by healthier desktop sales, and DCAI grew by $300 million. According to Zinsner, both divisions should rebound in the second half of the year as inventories normalize over the next few months.

Mobileye, the chipmaker's autonomous vehicle unit, wasn't immune to market forces either and saw revenues slip one percent year over year to $454 million. Intel expects the downturn to be short-lived, however: Zinsner projected that the division will return to year-over-year growth in the third quarter.

IFS was a small, if bright, spot in an otherwise challenging quarter for Intel. The division raked in $232 million, marking a 307 percent year-on-year increase on $57 million last year.

Zinsner noted this rise in revenues was down to sealing extra packaging deals and higher sales of IMS Nanofabrication tools. As we reported last month, Intel has sold its stake in IMS to Bain Capital in a deal valued at $4.3 billion.

IFS is likely to play a larger role in the silicon slinger's earnings as it pushes ahead with fab projects in Arizona, Ohio, and Europe. The first of these fabs is expected to come on line in 2024, alongside the next-gen process tech, dubbed PowerVia.

Looking ahead, Intel execs offered a cautiously optimistic outlook on the third quarter, marked by improving macroeconomic conditions and stronger demand for both its client and datacenter products. In terms of revenues, it projects revenues will fall roughly 13 percent year over year in Q3 to between $12.9 and $13.9 billion. ®