Is Intel’s Turnaround Strategy Hampering Its Recovery?

For over a year, Intel has been touting its foray into artificial intelligence as the next revolution in electronics that will springboard the company into a new generation of product development and production and position the company for future growth following several years of lackluster sales and earnings.

While Intel’s plans are well and good, the proof is in the execution, and a poor second quarter prompted the top-tier semiconductor supplier to resort to drastic measures, topped by the news the semiconductor supplier is cutting its workforce by 15%, or roughly 1 out of 7 positions.

Intel’s second quarter financial results were dismal. The company posted a second-quarter GAAP loss of $1.6 billion, or 38 cents per share on revenue of $12.8 billion. In the year-ago quarter, Intel posted GAAP net income of $1.5 billion, or 35 cents per share, on sales of $12.9 billion.

In a memo on Intel’s website, CEO Pat Gelsinger stated last week, “We have moved our All Company Meeting to today, following our earnings call, as we are announcing significant actions to reduce our costs. We plan to deliver $10 billion in cost savings in 2025, and this includes reducing our head count by roughly 15,000 roles, or 15% of our workforce. The majority of these actions will be completed by the end of this year.”

Related:Intel Seeks to Grab More of Semi Foundry Business

The statement added, “Simply put, we must align our cost structure with our new operating model and fundamentally change the way we operate. Our revenues have not grown as expected – and we’ve yet to fully benefit from powerful trends, like AI. Our costs are too high, our margins are too low. We need bolder actions to address both – particularly given our financial results and outlook for the second half of 2024, which is tougher than previously expected.”

For Intel, the actions are the latest in a series of blows to this proud semiconductor company, which started to turn things around last year after several years of depressed sales and earnings. Intel cut some jobs in early 2023 in response to its troubles at the time, but the company’s recent drastic actions may come as a shock to many who thought the worst was behind them.

As part of its goal to cut costs, Intel said it is announcing an enhanced company-wide retirement plan for eligible employees and offer an application program for voluntary departures.

AI Strategy

Intel has made no bones about its intention to capture the AI market, announcing processors aimed at AI applications and talking boldly about the AI PC. But at best, Intel is playing catch-up in this sector. Rival NVIDIA, which got an early jump on its rivals in AI, continues to unleash new and faster processors for generative AI applications and shows no signs of letting up. And, lurking in the background is Intel’s long rival AMD, who is also ramping up its offerings in processors for AI and machine learning.

Related:Has Intel Turned It Around?

Adding insult to injury, AMD appears poised to benefit from the turmoil surrounding its rival. AMD posted a profit in its second quarter, meeting its forecasted guidance. The company’s data center business recorded substantial growth, driven by shipments of its Instinct GPUs and EPYC CPUs.

Judging from Gelsinger’s statements, Intel appears steadfast on staying on course with its AI strategy and its moves to grow its foundry business. Gelsinger stated in his memo, “We must continue to drive our IDM 2.0 strategy, which remains the same: re-establish process technology leadership; invest in at-scale, globally resilient supply chain by expanding manufacturing capacity in the U.S. and EU; become a world-class, leading-edge foundry for internal and external customers; rebuild product portfolio leadership; and deliver AI Everywhere.”

Analysts Skeptical

But Intel’s strategy to turn around its business may be flawed.  Analyst Michael Del Monte, on the site Seeking Alpha, commented on Intel’s attempts to become a foundry services supplier. “I have reason to believe that management is beginning to realize that acting as the outsourced foundry of choice isn’t as appealing to competing chip designers, as capital deployed to their foundry business will not be as pre-emptive and more reactionary to new business. This cautious approach can potentially be a double-edged sword in which Intel is making the attempt to draw in new business to their foundry services while becoming more hesitant on making capital investments to make their foundry business an appealing option when compared to Taiwan Semiconductor.”

Related:Intel Goes All In On AI

Del Monte added, “Given the more realistic expectations that Intel Foundry Services may not be as grandiose as initially discussed, I believe management will refocus spending in the segment from hyper-growth, tech-like spending to a more disciplined approach. This factor may lead to significant improvements to operating margins and may in turn pull forward profitability on the back of lower revenue expectations.”

Intel’s strategy also came under fire from Rasoli Research, in another report on Seeking Alpha. Analyst Milad Rasoli noted, “Intel's pivot to the foundry business is extremely capital intensive and requires years for a proper infrastructure to be built out. More so, in the meantime, Intel is required to finance their tremendous losses by taking on additional debt or issuing shares, both of which greatly harm shareholder equity. “

Nor has Intel’s pivot to AI reaped the rewards the company had hoped for. Rasoli said in his report, “Intel's fundamental business is flawed and cannot get out of its own way currently. Somehow, in a time of AI boom, Intel's DCAI segment (Data Center & Artificial Intelligence) has had declining revenues and collapsing margins showcased in their recent quarter (6% decline in revenues and a 40% decline in operating income). Even scarier, Intel's Cloud Computing Group only grew their revenues 6.8%, at a time when AMD (AMD) and Nvidia (NVDA) have grown their CCG segments by triple digits.”

Lackluster Outlook

Intel’s third-quarter outlook is not likely to excite its followers and shareholders. The company is projecting revenue of $12.5 billion to $13.5 billion, with a GAAP net loss of 24 cents per share. The company is also suspending its stockholder dividend and will review all of its operations, hinting that additional restructuring may not be out of the question.