Intel pledges more cost cuts as sales forecast misses estimates

INTEL shares climbed in late trading after the chipmaker pledged to slash costs, an effort to weather a persistent slump in computer demand that is dragging down sales and profit and obstructing its turnaround efforts.

The company said actions including headcount reductions and slower spending on new plants will result in savings of US$3 billion next year, with annual cuts swelling to much as US$10 billion by the end of 2025. Third-quarter profit and revenue tumbled, Intel said on Thursday (Oct 27) in a statement, and it again scaled back 2022 revenue and profit targets.

Chief executive officer Pat Gelsinger had been banking on a rapid rebound in semiconductor sales to help fund his ambitious plans to restore Intel to its former dominance in the US$580 billion industry. Gelsinger, who predicted three months ago that the third quarter would be the nadir for the company’s performance, instead said that demand for Intel’s computer processors has fallen off even more sharply than projected and the outlook remains dour.

“The worsening macro was the story and is the story,” Gelsinger said in an interview. “There’s no good economic news.” Predicting a bottom for the market for computer chips currently would be “too presumptive”, he said.

Third-quarter net income was US$1 billion, or 25 US cents a share, down from US$6.8 billion, or US$1.67 a share, in the same period a year ago. Revenue dropped 20 per cent to US$15.3 billion. Before certain items, profit was 59 US cents a share. Wall Street was looking for a profit of 33 US cents on sales of US$15.4 billion.

Intel shares initially fell, then rose about 5.4 per cent in late trading following the announcement. Earlier, they closed at US$26.27. The stock has plummeted 49 per cent this year.

Earlier this month, Bloomberg News reported that Intel was planning a major reduction in headcount, likely numbering in the thousands, according to people with knowledge of the situation. Some divisions, including Intel’s sales and marketing group, could see cuts affecting about 20 per cent of staff, according to the people. In its earnings report Thursday, the company didn’t specify how many jobs would be eliminated.

Fourth-quarter revenue will be about US$14 billion to US$15 billion, the company said, compared with analyst estimates for US$16.3 billion. Profit, excluding certain items, will be 20 US cents a share, below the average prediction of 66 US cents.

For the year, Intel reduced its revenue forecast to US$63 billion to US$64 billion, a decline of as much as 20 per cent from 2021. Gross margin will narrow further than earlier anticipated to 47.5 per cent, and earnings per share will be about US$1.95.

SEE ALSO

Mobileye IPO not capital raise, but market entry: Intel CEO

Intel plans thousands of job cuts in face of PC slowdown

Gelsinger said that level of profitability isn’t good enough and is partially a result of inefficiencies in Intel’s operations that need to be addressed. The company’s plants, once the industry leader, will be forced to report their utilisation rates, and chip designers will have to improve at getting the blueprints they send to those facilities right the first time. Intel’s rivals use fewer people to get better results, he said.

One bright spot in Gelsinger’s plans to reshape the company came earlier this week, when Intel’s self-driving technology unit, Mobileye Global, began publicly trading in a partial spinoff. Its shares surged 38 per cent in their market debut Wednesday. Intel retains control of the division, which raised US$861 million in the share sale. Gelsinger has said Mobileye may serve as a template for other such transactions that will help Intel capitalise on the value of some of its assets.

Third-quarter sales for Intel’s data-centre division - which typically contributes an outsized portion of profit - dropped 27 per cent to US$4.2 billion, lower than the average analyst estimate of US$4.83 billion. Client computing, Intel’s PC-chip unit, reported a sales decline of 17 per cent to US$8.1 billion, compared with projections for US$7.78 billion. The unit picked up market share, Gelsinger said.

A collapse in consumer gadget-buying has spread into corporate spending amid concern that the global economy is heading towards a recession. That has confounded predictions by chip-industry leaders that the boom of the past two years could endure, driven by the proliferation of semiconductor use into more types of devices. Computer and smartphone demand remains the primary influence on the fortunes of the broader chip industry, which expanded by more than US$100 billion last year and some predicted would rapidly double to become a US$1 trillion business.

Many of Intel’s largest rivals have posted downbeat reports or warnings about the outlook for computer components, falling billions short of estimates or slashing their predictions. While periodic slumps are not unusual for the chip business, analysts are concerned that the current decline is driven more by a contraction of the economy than a buildup of excess inventory that would have the potential to clear out quickly. BLOOMBERG