Intel: Can it get back on its feet after shedding the "heavy burden"?

Intel released its Q3 2024 financial report (for the period ending September 2024) after the U.S. stock market closed on November 1, 2024, Beijing time. The key points are as follows:

1. Core Data: Once again in the red. Intel achieved revenue of $13.28 billion in Q3 2024, a year-on-year decline of 6.2%, slightly better than market expectations ($13.03 billion). The quarterly revenue decrease was mainly affected by declines in client business and data center and AI business. Intel's net profit for Q3 2024 was -$16.6 billion, a significant profit collapse, primarily due to the company accounting for multiple one-time expenses this quarter. Excluding these impacts, the company's operating profit for the quarter was near breakeven;

2. Business Performance: Losing market share, unable to enter the AI main battlefield. Client business and data center and AI business are the company's largest revenue sources, together accounting for over 80%.

1) Client Business: Lost market share in the PC segment. Client revenue for the quarter was $7.33 billion, a year-on-year decline of 6.8%, below market expectations ($7.46 billion). Meanwhile, the PC industry saw a shipment increase of 0.9%, and AMD's client business revenue rose by 29.5%, further eroding Intel's market share;

2) Data Center and AI Business: Revenue for the data center and AI business (including Altera) was $3.76 billion this quarter, a year-on-year decline of 1.4%, better than market expectations ($3.55 billion). Although $Intel(INTC.US) in this segment is still declining, it performed better than market expectations, mainly due to a recovery in demand for traditional services this quarter. As for AI, the company still finds it difficult to enter the main battlefield.

3. Intel's Performance Guidance: For Q4 2024, expected revenue is $13.3-14.3 billion (market expectation: $13.635 billion) and GAAP gross margin is 36.5% (market expectation: 36.4%). The midpoint of the revenue and gross margin guidance is slightly higher than market expectations.

Overall View of Dolphin: Intel's financial report this time is actually not bad.

Although the company reported a loss of up to $16.6 billion this quarter, a closer look at the financial report reveals that this was mainly due to multiple one-time impairment or related expenses. Excluding these impacts, the company's revenue and gross margin for the quarter met market expectations, and profits were near breakeven, overall not as bad as it appears on the surface

From a business perspective, the client business and data center and AI business are the company's core operations, accounting for over 80% of the total. However, there are no significant upward signs for these two businesses: 1) Client business: This quarter, despite double-digit growth from competitors, the company continues to decline; 2) Data center and AI business: This quarter, traditional server demand has shown some recovery, but the company has made no significant progress in the AI field, which is currently the market's main focus. This quarter, the total capital expenditure of the four major cloud vendors maintained double-digit growth, yet the company's data center and AI business still declined, indicating that the company has not entered the main battlefield of AI.

So why is this “no profit + losing market share + no signs of growth in AI” financial report still considered acceptable? It is because the market previously expected the company to perform worse or miss expectations, but in reality, the company's final operating performance and guidance for the next quarter met expectations. In addition, a series of operations by the company this quarter have demonstrated a strong “execution capability” to the market. In fact, the handling of over 10 billion in impairment and other expenses directly impacted short-term profits, but in the medium to long term, it is more beneficial for the company to “lighten its load” and start anew.

Although the company still finds it difficult to enter the AI battlefield, which is of utmost concern to the market in the short term, through business integration, personnel adjustments, impairment handling, and a series of operations, it is steadily focusing on its areas of expertise, which gives it a chance to navigate through this “crisis.”

Here is Dolphin's specific analysis of Intel:

1. Core Data: Large Provisions, Dragging Down Profits

1.1 Revenue: Intel achieved revenue of $13.284 billion in the third quarter of 2024, a year-on-year decrease of 6.2%, slightly better than market expectations ($13.025 billion). The year-on-year decline in quarterly revenue was mainly affected by the decline in client business and data center and AI business.

1.2 Gross Profit and Gross Margin: Intel achieved a gross profit of $1.997 billion in the third quarter of 2024, a year-on-year decline of 66.8%. The company's profits mainly came from the contribution of the PC client business.

In terms of specific gross margin, the company's gross margin this quarter was 15%, a quarter-on-quarter decline of 20.4 percentage points, far below market expectations (36.5%). The significant decline in gross margin was due to a one-time manufacturing asset impairment expense of $3.1 billion this quarter (mainly related to non-cash impairment or accelerated depreciation expenses for Intel 7), which was included in the cost item. Excluding this impact, the company's gross profit this quarter reached $5.1 billion, corresponding to a gross margin of 38.4%, indicating that actual operating performance met market expectations.

1.3 Operating Expenses: Intel's operating expenses in the third quarter of 2024 were $11.054 billion, a year-on-year increase of 83.4%. The significant increase in operating expenses was mainly due to a substantial rise in restructuring costs and goodwill impairment-related expenditures.

From a core perspective:

1) R&D Expenses: This quarter, R&D expenses were $4.049 billion, a year-on-year increase of 4.6%, with an R&D expense ratio of 30.5%. The company has begun personnel adjustments in the third quarter, and R&D expenses have decreased compared to the previous quarter, but it remains a significant item in the company's operating expenses;

2) Sales, Management, and Administrative Expenses: This quarter, sales and management expenses were $1.383 billion, a year-on-year increase of 3.2%; the sales management expense ratio remained stable at 10.4%;

3) Restructuring and Other Expenses: This quarter, the company's restructuring and other expenses amounted to $5.622 billion, a significant year-on-year increase. Specifically, restructuring costs consistent with the cost-cutting plan were approximately $2.8 billion; impairment of goodwill and other intangible assets was approximately $2.9 billion.

1.4 Net Profit: Intel's net profit in the third quarter of 2024 was -$16.64 billion, resulting in a massive quarterly loss.

The company's massive loss this quarter was primarily due to the recognition of multiple one-time expenses (including impairment costs for manufacturing assets such as production lines, restructuring costs, goodwill and intangible asset impairments, and valuation allowances for deferred tax assets), totaling $18.5 billion. Excluding these expenses and tax impacts, the company's operating profit this quarter was -$140 million, close to breakeven.

2. Detailed Data Situation: Losing Market Share, Unable to Enter the AI Main Battlefield

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

Starting from the first quarter of 2024, the company has readjusted its financial statements, separating Altera's business revenue from data center and AI, and rewriting Intel's external foundry revenue as foundry revenue and internal business offsets. For the continuity of data, Dolphin will still analyze based on the original business structure.

2.1 Client Revenue

Intel's client revenue reached $7.33 billion in the third quarter of 2024, a year-on-year decline of 6.8%, slightly below market expectations ($7.46 billion), which is the main reason for the company's revenue decline this quarter. Specifically, the Desktop business declined by 24.8%, while the Notebook business saw an 8.5% growth.

From industry data, global PC shipments saw a slowdown in growth this quarter. Global PC shipments reached 68.8 million units this quarter, a year-on-year increase of 0.9%, with overall market demand still weak. As for competitors, AMD's client business revenue grew by 29.5% year-on-year this quarter.

Putting it together for comparison. PC processor market: overall industry shipments +0.9%; AMD quarterly revenue +29.5%; Intel quarterly revenue -6.8%. From this, it can be seen that although industry demand is weak, there has been no decline. Intel's decline is mainly due to losing some market share.

2.2 Data Center and AI

Intel's data center and AI revenue reached $3.761 billion in the third quarter of 2024, a year-on-year decline of 1.4%.

This quarter, the company continued to separate its data center and AI business from the Altera business, with pure data center and AI revenue around $3.35 billion, a year-on-year increase of 9%, mainly due to improved demand for traditional servers this quarter.

For continuity of data, Dolphin still looks at the original business segmentation. The company's overall data center and AI business saw a slight decline, mainly due to a 44% year-on-year decline in Altera business, which is expected to normalize inventory in the first half of next year. Compared to rapidly growing peers (NVIDIA & AMD), the company has not seen significant benefits.

Current demand in the data center and AI market is mainly concentrated on the GPU side; even the new CPU demand driven by AI has been filled by NVIDIA and AMD's bundled CPU/GPU product offerings. Intel has been slow to penetrate the GPU market, and its original strengths in the CPU field are also threatened by competitors.

From the recent capital expenditures of the four major cloud providers (Microsoft, Google, Meta, and Amazon), the total capital expenditure for the four reached $64.9 billion this quarter, a year-on-year increase of 74% and a quarter-on-quarter increase of 11%. Meanwhile, Intel's data center and AI business declined by 1.4% year-on-year, effectively exiting the competition for market growth.

2.3 Network and Edge Domain

Intel's revenue from the network and edge domain reached $1.511 billion in the third quarter of 2024, a year-on-year increase of 4.2%, accounting for only 10% of total revenue. After a previous inventory adjustment in the client segment, the company's network and edge business has begun to recover from the bottom, with a shift in focus towards networking and telecommunications.

2.4 Other Major Businesses

1) Intel's Mobileye revenue reached $485 million in the third quarter of 2024, a year-on-year decline of 8.5%, accounting for less than 5% of total revenue. The decline this quarter was influenced by a reduction of over 50% in shipments to China, but the company still maintains its full-year revenue guidance.

2) Intel's foundry services revenue reached $55 million in the third quarter of 2024. The company has re-disclosed its foundry business this quarter, detailing its wafer business and internal offsets. Dolphin has combined the two to estimate the company's foundry service situation. Since the first quarter of this year, this data has been below $100 million for three consecutive quarters, indicating that the current foundry services have not gained any scaled customer orders.

Dolphin Investment Research on Intel Articles Review:

On August 2, 2024, Intel earnings report commentary “A Total Collapse, Intel's 'Pipe Dream'”

On April 26, 2024, Intel earnings report commentary “Intel: The Marginalized AI Bystander”

On January 26, 2024, Intel conference call “Intel 3, Is It an Opportunity? (Intel 23Q4 Conference Call)”

On January 26, 2024, Intel earnings report commentary “Intel: The Processor Throne No Longer, AI Battle Fails to Form an Army”

On January 17, 2024, Intel in-depth article “Intel: Is AI PC the Lifeline for the 'Toothpaste Factory'?”

NVIDIA Conference Call on November 22, 2023: The First Wave of Artificial Intelligence (NVIDIA Q3 FY24 Conference Call)

NVIDIA Financial Report Commentary on November 22, 2023: NVIDIA: Is the Computing Power Emperor Fully Armed? "False Fire" Flickering

Risk Disclosure and Statement of this Article: Dolphin Investment Research Disclaimer and General Disclosure