Intel’s Q1 Results Better Than Expectations, But Q2 Guidance Disappoints Investors

Intel managed to maintain revenue at $12.7 billion last quarter, which is the same as the same period last year. This result exceeded investors’ expectations of $12.3 billion in revenue, but the second-quarter outlook was disappointing, causing Intel’s stock price to decline by 5%.

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Strictly speaking, investors were looking for a second-quarter revenue estimate of $12.82 billion, and the midpoint of the $11.2 billion to $12.4 billion range is $11.8 billion, which is worse than the market expected. Moreover, Intel’s current-quarter revenue would represent a $1 billion decline year-over-year. Intel management explained that its second-quarter guidance reflects the uncertainty caused by macroeconomic instability. CFO David Zinsner was forced to say that the high volatility of U.S. and international trade policy, coupled with regulatory risks, increases the likelihood of an economic slowdown and even recession.

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Intel’s net loss for the first quarter reached $800 million, which is twice as much as the loss for the same period last year. Operating profit remained at $700 million, but the profit margin fell from 45.1 to 39.2%. New CEO Lip-Bu Tan said at the reporting event: “The first quarter was a step in the right direction, but there are no quick fixes for the process of returning to increasing market share and stable growth.” He also noted that he believes it is necessary to “fundamentally transform the culture” of Intel and its operations. The current corporate structure literally “stifles innovation,” and decisions are taken too long.

The company is ready to cut expenses. At the operating level, they are planned to be kept within $17 billion this year instead of the previous $17.5 billion, and capital expenditures are planned to be reduced from $20 to $18 billion. Next year, operating expenses are planned to be kept within $16 billion. Characteristically, these amounts do not take into account the restructuring expenses that Intel will incur this year. In the first quarter, Intel managed to reduce operating expenses by $700 million year-on-year and by $400 million sequentially. Intel also decided to postpone the purchase of assets of other companies until better times.

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In an interview with CNBC, the company’s CFO admitted that cost-cutting will involve laying off some employees, especially in management positions, but it is still difficult to determine the scale of these cuts. They will begin in the current quarter, as noted in a statement on the Intel website. Changes are also being made to the daily routine: by September, the company’s employees will have to spend at least four days a week in the office, thereby deviating from the “hybrid” work practice adopted during the pandemic. Intel’s reforms will be aimed at creating more compact and agile teams, as well as reducing the “number of layers” in the organizational structure.

Lip-Bu Tan admitted that he began to reform the development teams urgently, promoting the most talented employees and hiring new ones if necessary. Under the new head of Intel, the number of meetings will also be reduced, and they will also involve fewer participants.

In the server segment, Intel’s revenue grew by 8% to $4.1 billion, which to some extent helped maintain the company’s total revenue at the same level as last year. DCAI revenue fell sequentially by 5%, but still exceeded the company’s own forecasts. The networking and edge computing division is now classified as a data center segment according to the reporting structure. Lip-Bu Tan admitted that developing a full line of products for the artificial intelligence segment is one of the company’s priorities. In quantitative terms, deliveries of server-grade CPUs remained at the same level, while in terms of the number of processor cores, they increased. In any case, Xeon processors sold better than Intel expected in the past quarter. This was partly due to customer concerns about rising customs tariffs, so some volumes of products were purchased for future use.

In the client segment, Intel’s revenue for the first quarter fell by 8% to $7.6 billion year-on-year, and sequentially it fell by 13%. The volumes of product deliveries turned out to be higher than expected, but competitive pressure did not allow for positive dynamics. At the same time, the company’s CFO said that the PC market capacity as a whole grew by 3-5% due to the aging of the equipment fleet formed during the pandemic, the expansion of PCs with AI functions, as well as the end of the Windows 10 support life cycle. Demand for Raptor Lake processors exceeded Intel’s expectations, combined with an improved cost structure for the production of Meteor Lake processors, this allowed Intel to end the quarter with a profit margin of 39.2%, which is three percentage points higher than its own expectations.

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Overall, Intel’s revenue in the product area fell 10% sequentially to $11.8 billion, but was above the company’s expectations. Operating profit in the product area was limited to $2.9 billion, down $632 million sequentially. This amount corresponded to a quarter of Intel’s total revenue for the period.

The company’s revenue in the contract manufacturing segment increased from $4.4 billion to $4.7 billion, but its losses decreased from $2.4 billion to only $2.3 billion, although the operating loss rate almost stabilized at 49.7%, which is the minimum for the previous five quarters. The most unprofitable quarter for Intel’s contract business was the third quarter of last year, when the company lost $5.8 billion. Intel’s presentation separately emphasized that the production of products using 18A technology is being increased with the goal of releasing the first serial Panther Lake processors by the end of the year. They are planned to be presented before the end of this year, although some models will be released in the first half of the next. Under the leadership of Lip-Bu Tan, Intel’s contract division will have to win the trust of customers. Work is already underway with the latter to determine the key requirements for Intel 14A technology.

All other businesses saw revenue decline 15% sequentially to $943 million, but it was slightly above expectations. Mobileye, Altera, and IMS collectively had operating income of $103 million. The sale of a 51% stake in Altera to Silver Lake Partners should net the company $4.4 billion. The deal is expected to close in the second half of the year, after which Altera’s numbers will disappear from Intel’s financial statements.

At the end of the first quarter, Intel had $21 billion in free cash flow, received $1.1 billion in subsidies under the Chip Act and $1.9 billion from the sale of assets transferred in the deal with SK hynix in China. Discussing the outlook for the second quarter, Intel management noted that the increase in tariffs and other consequences of the “trade war” will lead to the fact that the total market capacity will decrease, prices will rise, and investments in expanding the production base may not be justified. In the second quarter, revenue in the server business will decline faster than in the client business. In addition, revenue in the contract business will fall, as Intel’s customers accelerated the placement of orders before the US government announced higher tariffs, and demand for the company’s services will cool somewhat in the second quarter. The profit margin in the second quarter will fall to 36.5%. This is significantly below the historical level of about 60%.