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With AI Payoff Lagging, Intel Takes Drastic Cost-Cutting Measures
Intel, long considered a bellwether of the enterprise tech industry, is facing major consolidation after a disappointing earnings report.
The company on Thursday reported $12.8 billion in net revenue for its Q2 2024, a year-over-year decline of just 1 percent. However, its semiconductor foundry business, now in its third year, is struggling, posting a loss of $2.8 billion for the quarter.
Intel CFO David Zinsner attributed the earnings losses to "the accelerated ramp of our AI PC product, higher than typical charges related to non-core businesses and the impact from unused capacity."
With the second half of its fiscal year expected to be even more challenging, the chip giant is taking drastic steps now to stem the flow. That includes slashing its headcount by at least 15 percent (or about 15,000 employees).
Intel intends to finalize most of these cuts by the end of 2024. Its goal is to cut operating and capital expenditures by at least $10 billion by 2025.
As Intel CEO Pat Gelsinger summarized in an internal memo, "Our revenues have not grown as expected -- and we've yet to fully benefit from powerful trends, like AI."
Amid the immense demand for AI-optimized processors, Intel has not seen nearly the success of rival Nvidia, which is estimated to cover as much as 95 percent of that market.
Intel seems to be counting on a re-energized PC market to turn its fortunes around. After years of declines, PC shipments are expected to grow again, driven by demand for PCs with built-in AI capabilities. Intel has previously stated it intends to puts its chips in 100 million AI-enabled PCs by 2025.
In a live earnings call, Gelsinger touted Intel's progress so far in the AI PC space. "We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined," he said. "And we remain on track to ship more than 40 million AI PCs by year-end and over 100 million accumulative by the end of 2025."
Gelsinger was also bullish about the performance of Intel's new and emerging AI PC chips -- Lunar Lake, Arrow Lake and Panther Lake -- and urged patience as its hardware investments take time to pay dividends.
"We previously signaled that our investments will define and drive the AI PC category would pressure margins in the near term," he said. "We believe the trade-offs are worth it. The AI PC will grow from less than 10% of the market today to greater than 50% in 2026."
Those projections may even be on the conservative side. Data from Gartner this past summer estimates that AI PCs will comprise 22 percent of all sales this year, and essentially 100 percent by the end of 2026.
In the meantime, however, Intel intends to run lean. Besides laying off thousands of employees and cutting costs, the company plans to shed low-performing products, eliminate bureaucratic redundancies and suspend its dividend starting next quarter.
Gelsinger characterized the plan as "some of the most consequential changes in our company's history."