‘Macro Weaknesses’ Made Intel Badly Miss its Q2 Financial Targets

What might otherwise have been a jubilant moment on Intel’s Q2 earnings call Thursday for CEO Pat Gelsinger immediately after congressional passage of the chips legislation he had lobbied heavily for (see 2207280060) instead degenerated into a sobering acknowledgement of Intel's missed financial targets for the quarter. Revenue of $15.3 billion was down 17% year over year and $2.7 billion below Intel’s April target, while earnings per share of 29 cents were 79% lower than a year earlier and 41 cents short of April's projections.

Though Intel continues to make “solid progress” on its long-term strategies, including the reshoring of Intel wafer production on U.S. soil, the Q2 results “were disappointing, below the standards we have set for the company,” said Gelsinger. “The sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design.” Gelsinger in Q&A blamed the suddenness of the downturn in defending Intel's decision not to preannounce the negative results. The stock closed 8.6% lower Friday at $36.31.

Q2 was “a challenging quarter negatively impacted by multiple factors,” said Chief Financial Officer David Zinsner. First was the “weakening and uncertain macroeconomic environment impacted by inflation, higher interest rates and the war in Ukraine,” he said. There also developed “a much larger than expected OEM inventory correction as our customers adjust to this new macroeconomic environment,” he said. “Worse than expected COVID-driven demand reductions and supply dislocations in China and other parts of the supply chain” compounded the problem, he said.

Intel’s senior management has “an obligation to remain vigilant and to respond to the changing business conditions while not losing sight of our long-term goals and opportunities,” said Gelsinger. Intel plans to speed deployment of its “smart capital strategy” and improve “product execution,” actions that should begin “to show dividends in the second half of the year,” he said. “The current economic backdrop only strengthens our resolve.”

The company is “planning for volatility as the world adjusts to the end of a two-plus-year pandemic and the unprecedented stimulus governments used to fight it,” said Gelsinger. Supply chain issues have “limited the ability to meet demand in some areas and driven inventory well above normal levels in others,” he said.

Though Intel is prepared “to manage through a slowdown typical of the normal cycles the semiconductor industry has experienced over the last 50 years,” the “depth and duration” of the slowdown are “still difficult to predict,” said Gelsinger. Gartner is projecting global semiconductor revenue growth to slow to 7.4% in 2022, down from 2021's actual growth of 26.3% (see 2207280021).

“Macro weaknesses” will force a roughly 10% decline in the total addressable market (TAM) this year for PCs, “characterized by broadening consumer weakness and relative strength in enterprise and higher-end SKUs,” said Gelsinger. Intel’s Q2 PC unit volume suggests “we are shipping below consumption as some of our largest customers are reducing inventory levels at a rate not seen in the last decade,” he said.

Though “COVID-related dynamics” like work from home and remote learning “pulled forward some demand, they also solidified the PC as an essential tool in the post-pandemic world,” said Gelsinger. Corporate PC usage “remains historically high even as the pandemic’s most acute impacts diminish,” he said. “Markedly higher per PC usage and a larger installed base, including 600 million PCs that are four years and older, supports a PC TAM sustainably above 300 million units.”

Intel was “thrilled to see the bipartisan vote in the Congress” to pass the chips package, said Gelsinger. “We have been integrally involved in moving this groundbreaking legislation forward. This progress, combined with the strong momentum in Europe, will reshape our industry and bring us toward a geographically balanced, resilient supply chain that we are uniquely positioned to enable and benefit from.” Gelsinger personally had lobbied heavily for the chips package, threatening at one point to delay Intel’s $20 billion investment to build two semiconductor fabs in Ohio if Congress failed to pass the legislation before leaving for the August recess (see 2207120045).

"Literally since World War II, there might not have been a more important piece of industrial policy that’s came forward through Congress," said Gelsinger of the chips package. "This is great for the semiconductor industry," he said. "We see this as an accelerant to our strategy and something that will give us the capacity" to meet Intel's product needs, plus the needs of its foundry customers, he said. "This is powerful and something that we are thrilled to have come across the line just today."

The “momentum continues” behind the Intel Foundry Services (IFS) manufacturing initiative, said Gelsinger. “Creating a geographically balanced, secure and resilient semiconductor supply chain, as well as access to our transistor technology, is driving strong customer interest in our foundry business.”

In addition to signing on MediaTek days ago as a new IFS customer for a range of smart edge devices (see 2207250014), “we now have active engagements with six of the top 10 fabless customers across our offerings,” said Gelsinger. “Overall, we are engaged with 30 customers for test chips, and now have more than 10 qualified opportunities in advanced stages across our process and package offerings that collectively represent a deal value of greater than $6 billion.”