Intel Posts $500 Million Loss for the First Time in Decades as Sales Drop 17%

Intel on Thursday posted its first loss in decades as sales of its processors for client PCs, and data centers dropped sharply in the second quarter because of what Intel calls "a rapid decline in economic activity" caused by inflation, geopolitical tensions, and the ongoing Russia-Ukraine war.

Intel's revenue in Q2 2022 totaled $15.3 billion, a 17% decline year-over-year (YoY) and a 22% drop sequentially. In addition, the company's gross margin fell 36.5% from 57.1% in the same quarter a year ago. The company also posted a loss of $0.5 billion, the company's first loss in decades. While Intel's quarterly loss looks shocking, it should be noted that the company had to make inventory reserves for upcoming product launches, which generated losses in accordance with GAAP.

"This quarter's results were below the standards we have set for the company and our shareholders," said Pat Gelsinger, Intel CEO. "We must and will do better. The sudden and rapid decline in economic activity was the largest driver, but the shortfall also reflects our own execution issues."

Shipments of Core and Xeon Decline for First Time in Years

Intel's main cash cow — the Client Computing Group (CCG) — earned $7.7 billion in revenue in Q2 2022, down 25% from the same quarter a year ago. There are several reasons why Intel's client CPU and chipsets sales dropped so significantly. Firstly, demand for PCs was down in Q2 both sequentially and YoY. Secondly, because PC OEM makers are uncertain about demand in the coming quarters, they buy fewer CPUs than they consume, prefer to use their existing stocks, and drain existing inventory. It means that as soon as their stashes drain, they will increase their purchases from Intel.

Intel's Datacenter and AI Group (DCAI) sales of datacenter hardware declined to $4.6 billion in Q2 2022, down from $5.5 billion in Q2 2021, a drop of 16% YoY. Intel mentioned three reasons for the decline: competitive pressure from AMD, mix-driven average selling price (ASP) decrease (which might be caused by the necessity to adjust prices or tailor offerings to respond to competition), and OEM inventory reductions.

The revenue of Intel's Network and Edge Group (NEX) was perhaps a ray of light in the company's otherwise gloomy earnings report as the business unit managed to increase its revenue to $2.3 billion, up 11% year-over-year. Intel says that NEX's good results were driven by solid sales of its 5G (which probably means compute solutions for infrastructure equipment) and Ethernet products. Meanwhile, Intel's NEX also began shipments of its codenamed Mount Evans 200Gb SoC IPU and started to ramp up shipments of the latest Xeon D-1700/2700 parts based on the Ice Lake-D microarchitecture.

One of Intel's most ambitious projects in recent years is indisputably its client and data center GPU endeavor led by Raja Koduri. But entering the GPU market is expensive, which is why the company's Accelerated Computing Systems and Graphics Group (AXG) lost a whopping $507 million in Q2 2022 on sales of $186 million (up from $177 million in Q2 2021) as Intel is ramping up shipments of Arc Alchemist, shipping its Blockscale mining ASIC, and is beginning to ship its supercomputing products. The loss is generated primarily by additional investments in R&D and prototyping and inventory reserves for the high-volume Arc launch in Q3.

The Intel Foundry Services has landed orders from Qualcomm and Mediatek, two major fabless developers of chips that sell hundreds of millions of chips a year. But IFS yet has to become a big business for the blue giant. As a result, Intel's foundry business unit sales dropped to $122 million, and it lost $155 million in Q2 2022. In addition, Intel says that demand for its photomask writing tools declined in the second quarter, yet the company had to continue investing in IFS.

Another bright spot in Intel's Q2 financial report is Mobileye's revenue of $460 million, a 40% increase year-over-year driven by high demand for EyeQ products. In addition, the unit's operating income totaled $190 million, which is a 43% increase YoY.

Gloomy Expectations

Intel now projects its Q3 2022 revenue to be in the range between $15 billion and $16 billion, down sharply from $19.2 billion in the same quarter a year ago. In addition, the company's gross margins are expected to be 43.2%, a drop from 56% in Q3 2021 but a notable increase from Q2 2022. 

Due to catastrophic Q2 results and macroeconomic uncertainties, Intel expects its 2022 revenue to total $65 billion – $68 billion, down 9% - 13% YoY and $8 billion – $11 billion lower than initially expected. As a result, the chip giant anticipates its 2022 margin totaling 44.8%.

"We are being responsive to changing business conditions, working closely with our customers while remaining laser-focused on our strategy and long-term opportunities," said Gelsinger. "We are embracing this challenging environment to accelerate our transformation."

In a bid to respond to market weakness, Intel plans to reduce its near-term spending as well as review production cost-cutting measures. In particular, the company is reducing its 2022 CapEx budget from $27 billion to $23 billion. Meanwhile, Intel will not sacrifice its long-term spending and big projects like new fabs in the U.S. and Europe.

"We are taking necessary actions to manage through the current environment, including accelerating the deployment of our smart capital strategy, while reiterating our prior full-year adjusted free cash flow guidance and returning gross margins to our target range by the fourth quarter," said David Zinsner, Intel CFO. "We remain fully committed to our business strategy, the long-term financial model communicated at our investor meeting, and a strong and growing dividend."