the drop in revenue accelerated to 32% and will continue to get worse

Quarterly revenue of Intel Corporation in the last quarter collapsed by almost a third, according to official statistics. Revenue for the whole of 2022 decreased by 20% to $63.1 billion. This year will also be difficult, as Intel management expects, but at the same time it is trying to find reasons for optimism and promises, for example, to maintain the size of dividends at a competitive level. The company’s shares fell in price after the close of trading by about 10%.

Image Source: Intel

CEO Patrick Gelsinger began his keynote address with the following words: “Despite economic and market challenges, we maintained progress on our strategic transformation in the fourth quarter, including advancing a forward plan to launch products and improve our operating structure and processes to improve efficiency, while staying within the lower bound of our revenue forecast. ».

CFO David Zinsner added: “In the fourth quarter, we took steps to streamline our organization and rationalize our investments, prioritizing where we can maximize long-term value.”. The company still expects to achieve $3 billion in cost savings this year and increase savings to $8 or $10 billion by the end of 2025.

In the fourth quarter, Intel’s revenue fell 32% year-on-year to $14 billion, profit margins fell from 53.6% to 39.2%, and GAAP net losses reached $700 million, although the company was able to make a net profit on a non-GAAP basis. in the amount of $400 million. According to both calculation options, the company’s profit decreased by about half.

Note that Intel’s quarterly revenue increased the rate of decline, since in the first quarter of last year it fell by 7% to $18.4 billion, in the second quarter by 22% to $15.3 billion, in the third quarter by 20% to $15.3 billion (in year-on-year), and by the fourth, the fall had reached 32%, as noted above. Thus, throughout the past year, Intel’s revenue has been declining year-on-year. The pattern is similar for other companies due to the comparison with the high growth period inherent in the pandemic, but it is especially pronounced at Intel.

  Image Source: Intel

Image Source: Intel

Intel’s client division’s fourth-quarter revenue fell 36% to $6.6 billion at once, as weakness in demand was most evident in the PC segment. In the fourth quarter, customer-side inventory remained at a higher level than originally expected, Intel management said. It will take at least the current six months to exhaust them. This did not prevent the company from raising the average selling price of client processors by 11% in the fourth quarter to a record level, since core products occupy a fairly strong market position in the upper price segment. The operating profit of the client division in the fourth quarter did not exceed $0.7 billion, having decreased in the annual comparison by 82% at once. At the end of all 2022 Intel revenue in a client segment was reduced by 23% to $31.7 billion.

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Last quarter, Intel’s revenue in the desktop segment decreased by 33% to $2.5 billion, in the mobile segment by 37% to $3.7 billion, from this proportion it becomes clear that the company receives more than half of its revenue in the client segment from the sale of mobile components. .

In general, Intel does not hide its confidence that sooner or later the established capacity of the PC market will be fixed at the level of about 300 million units per year, but this year it will drop to 270 or 295 million units. In the second half of last year, according to the head of Intel, the company strengthened its market position and expects this trend to continue this year.

Patrick Gelsinger did not undertake to predict when the supply of Intel components in the PC segment will return to growth: “Throughout calendar year 2022, our deliveries to customers were about 10% below consumption (retail), in the fourth quarter the proportion of underdeliveries increased significantly, and in the first quarter it will rise again, demonstrating the strongest utilization of accumulated stocks in the history of our observations. Although we know that the dynamics will reverse, when this will happen is difficult to predict.”. During a conversation with analysts, Gelsinger added that in the first quarter, the volume of consumption of the company’s products by customers will be two times lower than the volume of its supply from Intel.

In the presentation for the quarterly report, it was noted that the most demand for PCs fell in the consumer and educational sectors, since manufacturers have not yet had time to fully use up the accumulated stocks. In the first quarter, Intel’s customers, according to company management’s forecasts, will reduce inventory levels of components much faster than in the previous five quarters. The main hopes for the beginning of the market recovery, albeit timid, in Intel are associated with the second half of this year, guided by both comments from large customers and forecasts from third-party sources.

  Image Source: Intel

Image Source: Intel

In the segment of solutions for data centers and artificial intelligence systems, Intel in the fourth quarter gained a third less than a year earlier – only $ 4.3 billion. As noted in the presentation, both the reduction in market capacity and growing competition worked against it ( by AMD, mainly). Operating income in the server business fell 84% to $0.4 billion as costs rose and revenues fell due to the introduction of a new generation of processors, while maintaining the need to maintain investments in the development of future products at the right level. Revenue of Intel on the server direction at the end of the whole year decreased by 15% to $19.2 billion.

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Other segments of Intel’s activities in the corporate presentation are summarized in one slide, which demonstrates a modest increase in revenue of the AXG graphics division by 1% to $247 million and at the same time a reduction in its operating losses from $641 to $441 million. Tellingly, the increase in revenue in this area is explained by positive sales dynamics. components for supercomputer systems, but complain about its decline in the client sector. From now on, Intel’s discrete graphics business will be integrated into the Client Products (CCG) and Server Solutions (DCAI) divisions, respectively. According to the company’s management, this change in the organizational structure is better suited to the interests of the business in the transition from the phase of bringing discrete graphics to the market to the phase of market expansion. AXG division’s revenue for the entire 2022 grew by 35% to $837 million.

  Image Source: Intel

Image Source: Intel

This organizational change will not be limited. While Intel will continue to roll out existing telecom solutions in its lineup, investments in new product development for the NEX (Network and Edge) division will be phased out, resulting in cost savings. And this despite the fact that in the last quarter, the NEX division gained $2.1 billion, demonstrating a decrease in this indicator by only 1%, and at the end of the year increased revenue by 11% to $8.9 billion. In this context, Patrick Gelsinger considered it necessary to add that since he took over as CEO of Intel, the company has curtailed operations in seven business lines, and this has saved more than $ 1.5 billion in aggregate.

Intel is very proud of the high revenue performance of Mobileye, which recently entered the stock market. Revenue rose 59% year-over-year to $565 million as interest in vision and autopilot components continues to grow at a steady pace. Operating profit increased immediately by 71% to $210 million due to outpacing revenue growth. By the way, at the end of the year, Mobileye’s revenue grew by 35% to a record $1.9 billion.

IFS’s chip manufacturing division increased revenue by 30% to $319 million in the fourth quarter, driven primarily by higher orders from automotive component manufacturers. At the same time, rising costs forced the company to record operating losses in this area in the amount of $31 million.

The total revenue of Intel at the end of 2022 decreased by 16% to $63.1 billion, the rate of return did not exceed 42.6% according to the GAAP method and 47.3% according to the non-GAAP method, net profit decreased immediately by 60% to $8 billion according to the first method and by 65% ​​to $7.6 billion according to the second.

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Intel management categorically refused to give a forecast for revenue for the entire 2023, only expressing the opinion several times that in the second half of the year the situation in the main markets of presence will begin to improve. The forecast for the first quarter of this year implies a continued decline: the company expects to receive revenue ranging from $10.5 to $11.5 billion, a decrease in the profit margin to 34.1 or 39% (depending on the calculation method), as well as incurring losses in recalculated per share in the range from $0.15 to $0.80. By the way, the expected decrease in the profit margin by up to 4 percentage points at Intel is explained by the low degree of utilization of production lines.

At the same time, from January this year, the company sets a longer depreciation period for some types of production equipment – eight years instead of the usual five. This decision is explained not only by a banal desire to reduce depreciation costs this year, but also by the transition to the IDM 2.0 business model, more active participation in the contract services market, as well as the use of a dissimilar-chip layout. In fact, technological equipment will now pay for itself longer than before. The life cycle of many technical processes will increase, since they will now be in demand not only by Intel itself, but also by its customers.

In short, in 2023 alone, the new approach will reduce depreciation expenses by $4.2 billion. This will increase net income by $2.6 billion, reduce research and development costs by $400 million and reduce the carrying value of inventory balances at the end of the year by $1. 2 billion. Only in the first quarter of this year, the increase in the depreciation of equipment will bring benefits in the range of $350 to $550 million.

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