Losses Across All Segments, Intel's Unreal Dream

Intel released its second-quarter financial report for 2024 on the morning of August 2, 2024, after the U.S. stock market closed. The key points are as follows:

1. Core Data: Falling into losses again. Intel achieved revenue of $12.83 billion in the second quarter of 2024, a year-on-year decrease of 0.9%, slightly below market expectations ($12.95 billion). The decline in quarterly revenue was mainly due to the downturn in the data center and AI business. Intel's net loss in the second quarter of 2024 was -$1.61 billion, far below market expectations (-$540 million). The company's loss for this quarter continued to expand, mainly due to the collapse of gross profit margin.

2. Business Situation: Difficult to penetrate the AI market. Client computing and data center & AI business are the company's largest sources of revenue, accounting for over 80% in total.

1) Client Computing: The only business segment that grew this quarter. Client computing revenue reached $7.41 billion in this quarter, a 9.3% year-on-year growth. Business revenue is directly related to the PC industry, and current demand has not fully recovered.

2) Data Center & AI: Despite major companies frequently increasing capital expenditures, Intel's related revenue remains at the level of $3-4 billion. This indicates that the company is struggling to enter this wave of AI trends, and its existing CPU market share may be under pressure.

3. Intel's Performance Guidance: Intel expects revenue of $12.5-13.5 billion in the third quarter of 2024 (market expectation $14.37 billion) and a gross margin of 34.5% (market expectation 44.1%). The revenue and gross margin guidance are significantly lower than market expectations, putting the company's performance in a loss-making situation.

Dolphin's View: Intel's financial report this time is not very good, but the guidance provided by the company is even worse.

The company's revenue for this quarter was slightly below expectations, but the gross margin collapsed, far below market expectations. The company's loss continued to expand, reaching $1.6 billion in a single quarter. The gross margin for this quarter dropped significantly, mainly due to the impact of AI PC products, wafer capacity adjustments, and other non-operating expenses.

Compared to the unfavorable financial data, the guidance provided by the company is even worse. Intel expects revenue of $12.5-13.5 billion in the third quarter of 2024 (market expectation $14.37 billion) and a gross margin of 34.5% (market expectation 44.1%). Both core data points are significantly below market expectations. This indicates that the company's quarterly losses will continue

While major cloud providers are increasing capital expenditures, Intel's data center business has yet to show improvement, and the company's operating performance continues to deteriorate. The company's business mainly revolves around the CPU and traditional server fields, unable to benefit from new demand while losing market share to competitors.

Faced with significant losses, the company has begun to adjust its operations: layoffs, cost reductions, and dividend suspensions.

1) Layoffs: The company has decided to lay off 15% of its workforce, approximately 10,000-20,000 people, with the majority to be completed by the end of the year.

2) Cost Reductions: The company plans to reduce its total capital expenditures for 2024 by 20%, to $25-27 billion; further reducing total capital expenditures to $20-23 billion in 2025.

3) Dividend Suspension: Starting from the fourth quarter of this year, the company will suspend dividend payments for the first time in 32 years.

While various companies in the AI industry are increasing capital expenditures and expanding production capacity, Intel is continuously reducing its capital expenditures. This trade-off has cast a shadow over the already dim prospects. In the face of expanding losses, layoffs and cost reductions are necessary measures for operational adjustments. However, by cutting back on investments, the company will find it more challenging to enter the main battlefield of AI. The company's first dividend suspension in 32 years further undermines investor confidence. For a company that continues to incur losses with no turnaround in sight, the stock price will remain under pressure.

Below is Dolphin's specific analysis of Intel:

I. Core Data: Plummeting Gross Margin

1.1 Revenue: In the second quarter of 2024, Intel achieved revenue of $12.83 billion, a 0.9% year-on-year decrease, slightly below market expectations ($12.95 billion). The decline in quarterly revenue was mainly due to the downturn in the data center and AI businesses.

1.2 Gross Profit and Gross Margin: In the second quarter of 2024, Intel's gross profit decreased by 2% to $4.547 billion. The company's profits mainly come from the PC client business. In terms of gross margin, the company's gross margin for the quarter was 35.4%, a 5.6 percentage point decrease from the previous quarter, significantly lower than market expectations (42.1%). The significant drop in gross margin was due to the increase in AI PC products, accelerated wafer transition to the Ireland factory, and cost impacts from other non-core businesses.

1.3 Operating Expenses: In the second quarter of 2024, Intel's operating expenses were $6.511 billion, a 15.2% year-on-year increase. The increase in operating expenses was mainly due to higher research and development expenses.

Looking at the core aspects:

1) Research and Development Expenses: R&D expenses for this quarter were $4.239 billion, an increase of 6.6% year-on-year. The R&D expense ratio is 33%, with R&D investment still being the largest item in the company's operating expenses.

2) Sales, General, and Administrative Expenses: Sales and management expenses for this quarter were $1.329 billion, a decrease of 3.3% year-on-year; the sales management expense ratio is 10.4%, showing a slight decline.

1.4 Net Profit Aspect: In the second quarter of 2024, Intel's net profit was -$1.61 billion, with the quarterly loss continuing to expand, far below market expectations (-$0.54 billion).

The company's increased loss this quarter is mainly due to the collapse of the gross profit margin. While revenue did not show significant growth, it remained relatively stable. However, the gross profit margin experienced a significant decline due to factors such as AI PC and capacity adjustments. With the current gross profit margin at only 35.4% and the R&D expense ratio as high as 33%, it is difficult for the company to avoid losses.

II. Detailed Data Situation: Difficult to penetrate the AI market

Intel's business consists of client business, data center and AI, network and edge domains, Mobileye, and wafer foundry services. Among them, client business and data center and AI business are the company's largest sources of revenue, accounting for over 80% combined.

Starting from the first quarter of 2024, the company has once again adjusted its financial statements, separating out the revenue from Altera in the data center and AI segment, and rewriting Intel's external foundry revenue as wafer foundry revenue and internal business offset. For the sake of data continuity, we will continue to analyze based on the original business structure.

2.1 Client Revenue

Intel's client revenue reached $7.41 billion in the second quarter of 2024, a 9.3% year-on-year increase, making it the only growing segment among the company's various businesses. Within the business, Desktop and Notebook both saw varying degrees of growth, influenced overall by PC industry shipments.

From the industry data perspective, after experiencing a quarterly shipment bottom, the global PC shipment volume continues to rise, but the growth rate remains in single digits. This quarter, the global PC shipment volume was 64.9 million units, a year-on-year increase of 5.4%. Although the PC industry has emerged from the trough, the shipment volume is still relatively low, and the current market demand is still not very strong.

2.2 Data Center and AI

Intel's data center and AI revenue in the second quarter of 2024 reached $3.406 billion, a year-on-year decrease of 14.9%.

This quarter, after the company continued to separate the data center and AI business from the Altera business, the pure data center and AI business amounted to around $30 billion, a year-on-year decrease of 3%.

For the sake of data continuity, Dolphin still looks at the original business division. The company's data center and AI business as a whole remained stable, without significant benefits from the industry's demand growth. This is mainly because the demand for data center and AI markets is mainly concentrated on the GPU side. Even the additional CPU demand brought by AI is filled by Nvidia and AMD's own CPU/GPU product combinations.

As traditional CPUs continue to extend their depreciation cycles due to cloud giants, the pressure on the company may actually decrease. With competitors entering the market, the pressure on the company will be even greater.

2.3 Network and Edge Domain

Intel's network and edge domain revenue in the second quarter of 2024 reached $1.344 billion, a year-on-year decrease of 1.5%.

The network and edge domain business remains relatively sluggish, with the company affected by customer inventory adjustments.

2.4 Other Major Businesses

1) Intel's Mobileye revenue in the second quarter of 2024 reached $440 million, a year-on-year decrease of 3.1%. The company did not experience significant inventory adjustments in the previous quarter, but due to the impact of the automotive market environment, the company lowered Mobileye's revenue guidance for the second half of the year.

2) Intel's wafer foundry service revenue in the second quarter of 2024 reached $66 million. The company disclosed its wafer foundry business again this quarter, combining the company's wafer business and internal offset items. Dolphin combines the two to estimate the company's external foundry service situation. Although the company has been talking about wafer foundry outsourcing in recent years, there is still no clear sign of improvement in the data

Dolphin Research on Intel Articles Review:

April 26, 2024: Intel Financial Report Review "Intel: Marginalized AI Bystander"

January 2024: Intel Conference Call "Intel 3, Is it an Opportunity? (Intel 23Q4 Conference Call)"

January 2024: Intel Financial Report Review "Intel: No Longer the Processor King, AI Battle Fails"

January 17, 2024: Intel In-depth Analysis "Intel: AI PC, Is it the Lifesaver for the 'Toothpaste Factory'?"

November 22, 2023: NVIDIA Conference Call "The First Wave of Artificial Intelligence (NVIDIA 3QFY24 Conference Call)"

November 22, 2023: NVIDIA Financial Report Review "NVIDIA: Computing Power Tsar with Full Firepower? 'False Fire' Flickering"

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure