Intel: No longer the king of processors, AI battle ends in defeat

Intel released its fourth-quarter earnings report for 2023 (ending in December 2023) after the US stock market on the morning of January 26, 2024. The key points are as follows:

1. Core Data: Data exceeds expectations, actual operating performance meets expectations. In the fourth quarter of 2023, Intel achieved revenue of $15.4 billion, slightly exceeding market expectations ($15.2 billion). The revenue continued to increase compared to the previous quarter, mainly due to the recovery of the PC client business. In the fourth quarter of 2023, Intel's net profit was $2.669 billion, turning losses into profits compared to the same period last year, exceeding market expectations ($957 million). The improvement in profitability was mainly due to restructuring and other expense changes.

2. Business Performance: Positive growth in the client business, limited growth in data centers. The client business and data center and AI business are the company's largest sources of revenue, accounting for more than 80% of the total.

1) Client Business: Benefiting from the recovery of the PC market, the company's PC client business also showed significant growth. The revenue from the client business in this quarter was $8.844 billion, a year-on-year increase of 33.5%, exceeding market expectations ($8.455 billion).

2) Data Center and AI: Although the data center market is booming, Intel's revenue has remained at the $4 billion level. The potential market for CPUs is shrinking, and the company is also facing competition pressure and inventory adjustments. With competitors entering the market one after another, the company's competitive pressure is increasing.

3. Intel's Performance Outlook: The expected revenue for the first quarter of 2024 is $12.2-13.2 billion (market expectation: $14.27 billion), and the gross margin is 40.7% (market expectation: 42.5%). Both revenue and gross margin are lower than expected, mainly due to intensified competition in some businesses, leading to a decline in the company's performance.

Overall,

From the data, Intel's revenue and net profit both exceeded market expectations. However, Dolphin Research believes that the company's performance in this quarter overall meets expectations. The net profit performance is significantly better than market expectations, mainly due to the impact of restructuring and other expenses. If we exclude this impact, the company's operating profit is basically in line with market expectations.

Looking at each business segment, the company's client business continued to perform well this quarter, in line with the industry's recovery from the bottom of the PC market. However, another concern in the market is that the data center business did not show significant growth this quarter, revealing the company's lack of competitiveness. Based on the performance guidance for the next quarter: the company expects revenue of USD 12.2-13.2 billion for the first quarter of 2024 (market expectation: USD 14.27 billion) and a gross margin of 40.7% (market expectation: 42.5%). Both figures show a significant decline. Although some of it is due to seasonal factors, the magnitude also indicates that the company's business is facing another decline in the first quarter.

Dolphin Research previously mentioned in "Intel: AI PC, the Lifeline for the "Toothpaste Factory"?" that "Intel's growth in the data center and AI business has stagnated, mainly due to the weakening of the company's position in the market. The revenue share of the data center business among the three manufacturers (Intel, NVIDIA, AMD) has dropped from 70% to 20%." With the entry of competitors one after another, Intel's revenue share in the data center market will continue to decline. This quarter's earnings report once again confirms this point.

The toothpaste factory is no longer leading and needs to catch up by improving product strength in order to establish a foothold in the data center and AI market. Otherwise, it will only be left further and further behind.

Below is Dolphin Research's specific analysis of Intel:

I. Core Data: Better-than-expected data, actual operations in line with expectations

1.1 Revenue: Intel achieved revenue of USD 15.4 billion in the fourth quarter of 2023, slightly exceeding market expectations (USD 15.2 billion). Revenue continued to increase QoQ this quarter, mainly due to the recovery of the PC client business.

1.2 Gross Profit and Gross Margin: Intel achieved a gross profit of USD 7.047 billion in the fourth quarter of 2023, a YoY increase of 28.1%. As for the gross margin, the company's gross margin this quarter was 45.7%, showing a QoQ increase. The increase in gross margin is mainly due to the profitability of the client business and the increased proportion of Mobileye.

1.3 Operating Expenses: Intel's operating expenses in the fourth quarter of 2023 were USD 4.462 billion, a YoY decrease of 32.7%. The decrease in operating expenses is mainly due to restructuring and other related expenses. Key Points:

1) R&D Expenses: R&D expenses for this quarter were $3.987 billion, a YoY decrease of 10.7%. The R&D expense ratio decreased to 25.9%, remaining the largest component of the company's operating expenses.

2) Sales, Management, and Administrative Expenses: Sales and management expenses for this quarter were $1.617 billion, a YoY decrease of 5.2%. The sales management expense ratio remained at around 10%.

1.4 Net Profit: Intel's net profit for Q4 2023 was $2.669 billion, turning a loss into a profit YoY, exceeding market expectations ($957 million). The growth in company performance this quarter was mainly due to restructuring and other expense changes. If we exclude the impact of nearly $1.6 billion YoY, the company's operational performance is in line with market expectations.

II. Segment Data: The Challenging AI Market

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

2.1 Client Computing Revenue

Intel's client computing revenue reached $8.844 billion in Q4 2023, a YoY growth of 33.5%, exceeding expectations ($8.455 billion). Both desktop and notebook segments showed significant recovery, benefiting from the rebound in the PC market.

Looking at industry data, global PC shipments have rebounded from a bottom of over 50 million units in a single quarter to around 70 million units. The YoY growth rate has gradually shifted from negative to positive. Intel's client computing business will benefit from the recovery of the PC industry from the bottom.

2.2 Data Center and AI

Intel's revenue from data center and AI reached USD 3.985 billion in the fourth quarter of 2023, a YoY decrease of 7.4%.

Data center and AI business is the company's second largest source of revenue and is also a business with high market expectations. Although the demand for data centers remains strong, the business revenue has yet to break through.

The YoY decline in this quarter is mainly due to the shrinking potential market for CPUs, as well as the impact of competitive pressure and inventory adjustments on the company. With competitors entering the market one after another, the company's competitive pressure continues to increase.

2.3 Networking and Edge Domain

Intel's revenue from networking and edge domain reached USD 1.471 billion in the fourth quarter of 2023, a YoY decrease of 28.6%.

The networking and edge domain business continues to be sluggish, and the company is affected by sustained weak demand and increased customer inventory.

2.4 Other Major Businesses

1) Intel's revenue from Mobileye reached USD 637 million in the fourth quarter of 2023, a YoY growth of 12.7%.

Mobileye business is a business that continues to grow YoY, apart from client business, mainly driven by the increase in EyeQ shipments.

2) Intel's revenue from wafer foundry services reached USD 291 million in the fourth quarter of 2023. Looking at the previous two quarters, the company's wafer foundry services did not show significant improvement and are still maintained at a scale of around USD 300 million.

Dolphin Research on Intel and Data Center Company related articles:

January 17, 2024, Intel in-depth analysis: "Intel: AI PC, is it the lifeline for 'toothpaste factory'?"

November 22, 2023, NVIDIA conference call: "The first wave of artificial intelligence (NVIDIA 3QFY24 conference call)" Analysis of NVIDIA's Financial Report on November 22, 2023: "NVIDIA: Is the Computing Power Emperor at Full Blast? The "False Fire" is Flickering" Link

Analysis of AMD's Financial Report on November 1, 2023: "Without NVIDIA's Explosive Power, AMD's Recovery is Too Slow" Link

AMD's Conference Call on November 1, 2023: "AI PC, a New Wave of Productivity (AMD 3Q3 Conference Call)" Link

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