Intel reported fourth-quarter earnings that beat expectations, but gave a disappointing outlook for the first quarter of 2024 that sent its stock plunging over 10%.
The weak guidance overshadowed the chipmaker’s better-than-expected Q4 results and highlighted ongoing demand issues, especially in Intel’s key data center and AI business.
Q4 Earnings Beat Estimates But Q1 Outlook Falls Short
Intel reported Q4 adjusted earnings per share of $0.54, well above expectations of $0.09, on revenue of $15.4 billion that also topped estimates. However, Intel said it expects to post an adjusted loss in Q1 amid revenue of about $11 billion, far below the $16 billion analysts were forecasting.
The disappointing outlook shows Intel is still struggling with waning demand for its server chips as customers work through excess inventory built up during the pandemic. It also highlights troubles in Intel’s nascent foundry business. Here’s a summary of Intel’s latest earnings results:
| Metric | Reported | Expected |
|---|---|---|
| Q4 Revenue | $15.34 billion | $14.5 billion |
| Q4 Adjusted EPS | $0.10 | $0.09 |
| Q1 Revenue Outlook | ~$11 billion | $16 billion |
Intel CEO Pat Gelsinger said the Q1 guidance “reflects deteriorating economic conditions.” The company did note some bright spots, like progress on its turnaround plan and new product ramps later this year. But analysts were largely focused on lingering weakness in the data center.
Data Center and AI Demand Still Slow
Intel has staked much of its future on the data center and AI markets, but demand is recovering slower than expected coming out of the pandemic. The company’s Datacenter and AI (DCAI) segment generated $4.3 billion in Q4 revenue, down 33% and missing estimates.
For the full year 2023, DCAI revenue dropped 32% to $18.6 billion amid inventory corrections. This means customers worked through excess components purchased earlier in the pandemic, reducing new orders for Intel’s lucrative server chips.
The DCAI segment was already struggling coming into earnings. In October, weak data center demand prompted Intel to cut its 2022 guidance. And last quarter, DCAI sales dropped 27% as enterprise and government spending slowed.
The trend continued last quarter and is pressuring Intel’s attempts to regain market share lost to competitors like AMD and Nvidia. Patrick Moorhead, president of Moor Insights & Strategy, said the latest results show Intel’s data center turnaround will “take longer than they originally thought.”
Analysts now warn enterprise spending on data centers and AI could remain muted at least through the first half of 2024. But Moorhead remains confident in the long-term opportunity. “Make no mistake about it; the data-centric opportunity is still there,” he said.
PC Market Stabilizing
There were some bright spots in Intel’s latest report, however, especially around PCs and laptops. Global PC shipments declined almost 30% last year amid surging inflation and a pullback in demand after the work-from-home and online school boom.
But Intel said it believes the inventory correction phase of the recent PC downturn has reached its end. The company reported that its Client Computing Group (CCG), which supplies PC chips, generated $6.6 billion in Q4 revenue. That beat expectations despite an overall PC market that was still down about 20%.
“End-demand indicators imply ongoing improvement in the macroeconomic climate with low inventory levels across the PC supply chain,” Intel said.
Analysts agree PC and laptop demand seems to be stabilizing as excess inventory finally gets cleared out. While the traditional computer market is maturing, Intel expects to benefit this year from new releases like its 13th Gen Core chips and the launch of Windows 12.
“The PC slump is nearly over,” declared tech publication The Verge in its Intel earnings analysis. “Intel sees the processor market rebounding soon.”
However, the PC turnaround wasn’t enough to offset ongoing data center weakness last quarter. And analysts caution Intel will face tough competition from AMD and others in the maturing PC space this year.
Foundry Woes Weigh on Outlook
Another major headwind for Intel is its fledgling foundry business that manufactures chips designed by other companies. Intel’s first foundry customer was Qualcomm, which uses a variation of Intel’s manufacturing process for some mobile chips.
But in November, Qualcomm said it would move production of its new Snapdragon modem destined for 2024 iPhones to TSMC. The loss was a blow for Intel Foundry Services (IFS) as it tries to compete against the likes of TSMC and Samsung.
CFO David Zinsner said the foundry unit is ramping slower than expected and pressuring Intel’s outlook. “IFS remained well below plan as the business scales more slowly than anticipated,” he told analysts. The warning on foundry risks Intel falling further behind rivals in advanced semiconductor manufacturing.
Analysts say Intel’s foundry struggles, combined with ongoing data center weakness, create uncertainty around its restructuring plans laid out two years ago. “The cadence of the turnaround is still very much a work in progress,” Bank of America analyst Vivek Arya wrote after earnings.
Outlook: Economic Uncertainty Clouds Restructuring Progress
Looking ahead, Intel said it expects adjusted losses for the first three months of 2024 amid revenue of only $11 billion, plus or minus $1 billion. That outlook disappointed Wall Street, which was looking for over $16 billion.
Intel blamed “deteriorating economic conditions” for the weak Q1 guidance. Specifically, it sees further DCAI declines reflecting lower enterprise spending and channel inventory reductions. Economic uncertainty also surrounds the company’s PC business and IFS foundry plans.
Beyond macro concerns in Q1, Intel expects to regain momentum later this year with new data center product ramps and its continuing restructuring initiatives:
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Its latest Xeon data center platform, Sapphire Rapids, will reach full production volume in Q2. Management is “confident in Sapphire Rapids,” which aims to boost performance up to 60% versus the previous generation.
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PC demand improvement through 2023 will be driven by Intel’s Raptor Lake 13th Gen Core processors and the launch of Windows 12.
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Cost cutting remains on track, including $3 billion in savings this year as Intel works towards $8 billion to $10 billion by 2025. These efforts aim to improve gross margins longer-term.
Yet analysts say Intel faces challenges ramping up foundry customers in a volatile macro environment. Its data center fight with AMD and Nvidia also shows no signs of easing. “[There’s] still much work to be done,” Morgan Stanley said after earnings.
So while Intel’s latest quarter beat estimates, disappointing guidance and ongoing turnaround risks sunk the stock. Investor patience continues being tested well into 2024, with a still cloudy outlook amid economic uncertainty.
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