Intel suspends dividend, cuts $10B in costs: CEO reacts

Summary

In a candid interview, Intel CEO Pat Gelsinger addresses the company's recent earnings report, acknowledging the pressure on the business and the stock. He discusses the challenges, including a weaker outlook and restructuring changes, emphasizing the company's commitment to a sustainable financial model for the future. Gelsinger outlines Intel's product and process milestones, the decision to accelerate AI PC production, and the impact of operational adjustments on margins. He also addresses concerns about the company's turnaround, emphasizing the importance of maintaining a strong culture while making tough decisions for long-term success.

Takeaways

• 📉 Intel's latest earnings report shows the company is under significant pressure.
• 📊 The top line was within the expected range, but the bottom line faced challenges due to lower margins and one-time issues.
• 🔧 Intel accelerated its AI PC production, impacting margins negatively.
• 🔄 Major restructuring is underway to create a more financially sustainable model.
• 🏭 The move to the Ireland factory had a significant negative impact on margins.
• 🛠 Operational changes and a new operating model are in progress to mature Intel's Foundry and products.
• 📉 Market recovery is slower than anticipated, affecting various cyclical businesses.
• 🚗 The auto and FPGA businesses are recovering more slowly, with inventory issues in the client business.
• 🌐 No significant changes in market share, with market conditions impacting Intel's performance.
• 💡 Long-term optimism remains with expectations of growth in AI PC and AI accelerators.
• 🇺🇸 U.S. manufacturing plans remain unchanged despite capex reductions to build a more efficient Intel.
• 👥 Headcount reduction by 15% to address inefficiencies while aiming to respect and support affected employees.
• 🏗 Focus on building a world-class Foundry and fabulous company to ensure long-term sustainability.
• 📉 Near-term challenges are acknowledged, but the vision is to transform Intel into a sustainable and iconic company.

Q & A

What was the primary concern for Intel's latest earnings report?

The primary concern was the pressure on the stock and the business, including challenges with China export and a weaker outlook, which led to a major announcement about structural changes for the future.

How did the acceleration of the AI PC component production impact Intel's margins?

The acceleration of the AI PC component production in the new factory led to lower margins, which had a significant negative impact compared to what was indicated at the beginning of the quarter.

What major structural changes did Intel announce?

Intel announced a major restructuring, which is considered the biggest since the memory microprocessor decision four decades ago, focusing on a new operating model for Intel products and Intel Foundry for long-term financial sustainability.

How did operational challenges and market conditions affect Intel's outlook?

Operational challenges, such as the move to the Ireland factory and the immaturity of the new operating model, combined with a softer market and slower recovery in cyclical businesses, moderated Intel's outlook.

What is Intel's plan regarding the US manufacturing expansion and the CHIPS Act?

Intel's plan to build out US manufacturing remains unchanged, with projects being milestone-based and on track. The company continues to see momentum with the US Government's CHIPS program and maintains its commitment to being a world-class foundry.

What was the reason behind Intel's decision to reduce capital expenditure (capex)?

The capex reductions are focused on building a more efficient Intel, as the company has made significant catch-up investments in recent years and is now looking to manage capital investments carefully in line with the new operating model.

How does Intel plan to address the headcount reduction and its potential impact on company culture?

Intel plans to treat the headcount reduction with respect and dignity, focusing on changing the culture to be more efficient and identifying areas of inefficiency while maintaining the commitment to the success of the company.

What is the expected impact of the headcount reduction on Intel's turnaround strategy?

The headcount reduction is expected to be a part of a 'clean sheet' approach to identify inefficiencies and improve the company's operations, which is considered healthy for a sustainable Intel in the long term, despite the near-term challenges.

How does Pat Gelsinger view the significance of the recent changes and challenges at Intel?

Pat Gelsinger views the recent changes and challenges as a necessary part of transforming and rebuilding Intel, taking the steps seriously and with a commitment to create a sustainable company for the long term.

What is Intel's outlook for the third quarter and beyond?

Intel's outlook for the third quarter is below consensus, with market recovery happening more slowly than expected. However, they remain optimistic for the long term, expecting slightly above normal growth rates in the fourth quarter and stronger product lines and AI accelerators in the following year.

How does Intel address the issue of market share and competition in areas like AI and data centers?

Intel sees no market share changes from the beginning of the year and attributes the current situation to market effects. They are focusing on strengthening their products in AI and data centers and expect to regain share and continue growth as market conditions improve.

Outlines

00:00

📉 Intel's Earnings Report and Business Challenges

In the earnings report discussion, Intel CEO Pat Gelsinger addresses the company's financial pressures and stock performance. Despite challenges in China's export and a lower bottom line due to the acceleration of the AI PC production, Gelsinger credits the company's product and process milestones. He outlines the company's restructuring plans, emphasizing the need for a financially sustainable model for the future. The decision to move production to Ireland negatively impacted margins, and operational issues within Intel's new business models are being addressed. Gelsinger assures that despite the pressure and the need for cost reduction, the company remains committed to its journey, focusing on long-term health and innovation.

05:01

🛠️ Restructuring and Future Outlook for Intel

The second paragraph delves into Intel's restructuring, which Gelsinger considers the biggest since the company's decision to focus on microprocessors four decades ago. He explains the new operating model for Intel products and Intel Foundry, aiming for efficiency and long-term effectiveness. Gelsinger acknowledges the market's slower recovery and the impact on Intel's outlook, with cyclical businesses taking longer to recover and inventory issues in the client business. Despite these challenges, he remains optimistic about the long-term, with expectations of market recovery and product line strength in the coming year. The discussion also touches on the company's commitment to the US government's chip program and adjustments to capital investments to build a more efficient Intel.

10:02

💼 Culture, Turnaround, and Commitment at Intel

In the final paragraph, Pat Gelsinger discusses the impact of headcount reduction on Intel's culture and the company's commitment to turnaround. He emphasizes the importance of treating employees with respect during this transition and the necessity of these changes for a sustainable future. Gelsinger reflects on his personal connection to Intel, his commitment to the company's vision, and the seriousness with which he approaches the current challenges. He assures that the steps taken are in the best interest of Intel's long-term success, focusing on both financial performance and technological innovation.

Keywords

💡earnings report

An earnings report is a company's official statement of its financial performance over a specific period, typically a quarter or a year. It is a key indicator of a company's profitability and is closely watched by investors and analysts. In the video, Intel's latest earnings report is under focus, indicating the importance of this document in assessing the company's current financial health and future prospects.

💡chip giant

The term 'chip giant' refers to a company that is a major player in the semiconductor industry, known for its production of microchips or integrated circuits. Intel is referred to as a chip giant in the script, highlighting its significant role and influence in the technology sector.

💡margins

Margins in a business context refer to the difference between the cost of production and the selling price of goods, indicating profitability. The script mentions that Intel's margins were negatively impacted by the acceleration of their AI PC components production, which is a critical factor in understanding the company's financial challenges.

💡AI PC components

AI PC components are parts of a personal computer that are designed to support or enhance artificial intelligence capabilities, such as specialized processors or chipsets. The script discusses Intel's decision to accelerate the production ramp of these components, which has had financial implications for the company.

💡restructuring

Restructuring in a corporate setting involves making significant changes to a company's structure, operations, or management to improve efficiency or address challenges. The video mentions Intel's major restructuring as a response to market conditions and internal challenges, aiming to create a more sustainable and effective business model.

💡operating model

An operating model defines how a company runs its business, including its processes, systems, and culture. The script refers to Intel's new operating model, which includes Intel Foundry and Intel products, as part of the company's strategy to adapt and remain competitive in the market.

💡headcount reduction

A headcount reduction is a measure taken by a company to decrease the number of employees, often as a cost-saving initiative. The script discusses Intel's plan to reduce headcount by 15%, which is a significant move reflecting the company's efforts to streamline operations and improve financial sustainability.

💡dividend cut

A dividend cut refers to a reduction in the amount of dividend a company pays to its shareholders. In the script, the dividend cut at Intel is mentioned as one of the measures taken in response to financial pressures, indicating a need to preserve capital and manage resources more conservatively.

💡capex cuts

Capex, or capital expenditure, refers to the funds a company spends to acquire, maintain, or improve its assets. Capex cuts imply a reduction in these expenditures. The script mentions Intel's decision to cut capex for the current and next year, which is part of the company's strategy to become more efficient.

💡market share

Market share is the portion of the total market demand for a particular product or service that a company captures. The script notes that Intel has not seen any significant market share changes, suggesting that despite challenges, the company's competitive position in the market remains stable.

💡foundry

In the semiconductor industry, a foundry is a company that manufactures chips for other companies under contract. The script discusses Intel's ambition to be a world-class foundry, indicating the company's strategic shift towards contract manufacturing as part of its long-term vision.

Highlights

Intel CEO Pat Gelsinger discusses the challenging quarter for Intel, noting pressures on the business and a weaker outlook.

Gelsinger highlights that the top line landed within the expected range, but there were challenges with the China export and lower margins due to the acceleration of AI PC components.

Intel made a major announcement about restructuring changes aimed at creating a financially sustainable model for the future.

Gelsinger acknowledges the surprise in margins due to the decision to move production to the Ireland Factory, impacting operational costs.

The new operating model, Intel Foundry and Intel products, is still maturing, and steps are being taken to improve it rapidly.

Market conditions are recovering more slowly than anticipated, affecting the outlook for Intel's cyclical businesses.

Intel is taking aggressive steps to combine product and process milestones with a sustainable financial model for the long term.

Gelsinger emphasizes the importance of treating employees with respect and dignity during headcount reductions.

Despite the challenging period, Gelsinger remains committed to the vision and transformation journey of Intel.

The third-quarter outlook is below consensus, with slower recovery in areas like the Auto industry and FPGA business.

Gelsinger mentions that there have been no meaningful changes in market share, indicating that the challenges are market-driven.

Intel's AI PC components and AI accelerators are expected to see stronger growth in the fourth quarter and beyond.

The dividend and capex cuts are aimed at building a more efficient Intel, with no changes in the company's strategy or U.S. manufacturing plans.

Gelsinger discusses the importance of building a world-class Foundry and managing capital investments carefully.

The headcount reduction of 15% is part of a strategic effort to create a more efficient and sustainable Intel, focusing on business and function efficiency.

Intel's new operating model aims to separate and optimize the company’s structure, focusing on best-in-class industry standards.

Gelsinger emphasizes his personal commitment to Intel's long-term success, viewing the company as part of his legacy.

Gelsinger reaffirms the importance of treating affected employees with respect during the restructuring process.

The restructuring efforts are intended to ensure Intel's sustainability in both product and financial performance.

Transcripts

Intel's latest earnings report very much

in Focus challenge quarter for the chip

giant I want to get right to Intel CEO

Pat Giger Pat good to see you as always

no matter what you report I I have to

give you credit uh Rainer shine you're

always here talking to Yao Finance after

these results we thank you for taking

the time um I I I don't know how else to

put this quarter um the stock is under a

lot of pressure um maybe we can go

through this line by line how much how

much pressure is your business under

right now yeah hey thanks sazy always a

pleasure to chat with you uh you know

the quarter we landed the top line

within the range we said we had the uh

you know challenges with the China

export but the big news of course was

the bottom line and uh for that uh it

was uh very much hey we accelerated the

aipc uh and uh that had lower margins as

we moved into our next Factory to

accelerate the ramp of it which was

negative and obviously some other

one-time things that we referenced uh as

well but was much more the Outlook where

it was a weaker Outlook as well as we

expect some of those challenges to

persist and we made a major announcement

about our structuring changes uh as we

look to the Future so overall a lot of

great product and process Milestones you

all say phase one of the journey you

know it's just stunning what we've been

able to accomplish and now time to take

pretty aggressive steps on the

financially sustainable model for Intel

for the future and that's what we've

rolled out you know we're very committed

to the journey that we're on what

surprised you I on the cost front as you

went through the

quarter well clearly uh as we made this

decision to move into our Ireland

Factory from our TD Factory had a quite

a large negative impact on our margins

from where we indicated at the beginning

of the quarter this is the right thing

to do get into the production factory

accelerate the volume ramp of our AI PC

components but it was a surprise and

that and some of our own operational

things as we said this new operating

model Intel Foundry Intel products you

know we're not mature yet and we're

making the steps necessary you know to

mature that rapidly and overall you as

we'd say you know the market was a

little bit softer some of our cyclical

businesses taken a bit longer to

recovery some of the inventory digestion

that we spoke about uh as well in areas

like our client business so I'll say all

of those put together you know moderate

our Outlook and we're taking the steps

for a more SU sustainably financially

effective Intel for the future this is

the biggest restructuring of Intel I'd

say since the memory microprocessor

decision four decades ago you know we

laid out the new operating model and

we're taking decisive steps to execute

on the process and product work that

we've done to now combine it with an

operating model to make us effective for

the long term Pat this is a this is

challenging stuff this has to test

every leadership principle you you've

learned over Decades of doing

this well you know anytime I have to go

to my Intel family and say sorry we have

to take steps to reduce our headcount

you know that is challenging you know

and we're going to do that with respect

and dignity because many of these are

you know just people that are so

committed to the success of Intel and we

also realize we have to combine you know

that heart with making the decisions to

make a healthy Intel the long term

that's the most important thing that

we've done this is a unique company a

company that truly bends physics and

chemistry in ways that are you know

barely seem possible until we've made it

common place and we now have to have

this new operating model Intel products

and Intel Foundry for sustainable

Financial results that allow us to

continue to execute that in

extraordinary Vision you know for

decades to come that's the tough steps

that we're rolling out yeah it's a

challenging period but this is what I

signed up for and committed you know to

do with this leadership team the third

quarter Outlook too um below consensus

as well what don't you see getting

better quarter over

quarter overall we see the market

recovering more slowly than what we

indicated at the beginning of the year

all of our cyclical businesses see

Improvement but less so and you know

we've seen that in the Auto industry the

fpga business each one of them are

recovering more slowly we have some

inventory in the client business that we

have to work through you know the data

center business remains primarily driven

by the AI buildout so the CPU portion

the Zeon portion of that is more modest

so I'll say everything is moving a bit

more slowly in the second half of the

year than we would have indicated

earlier you know but the overall Trends

we see more positive in the fourth

quarter you we see slightly above right

normal growth rates in the fourth

quarter and clearly as we go into next

year you know things like corporate

refresh aipc accelerate you know our

product lines are stronger and our new

AI accelerators start to ramp more

effectively so we're still optimistic

for the long term but we realize that

the second half of the year a bit more

challenged than we would have indicated

is this a market issue or or a product

issue

pet we see no market share changes than

we felt at the beginning of the year so

we'd say every one of the things that I

just said are Market effects uh in that

regard we see no meaningful change in

our market share you know position now

obviously areas like AI you know have

driven the discussion on where the

Investments and data center and Cloud go

so even as our products get to be

stronger in those areas and we've

launched our new products you know the

overall market conditions are ones that

we haven't found as much momentum as we

would have hoped so each one of these is

a market condition

and as we get stronger over time we'll

be better positioned to start regaining

share in some areas like Data Center and

accelerators and continue the strong

growth in our areas like

aipc of course we have to also say about

The Foundry and we're seeing a good

momentum in areas like our Advanced uh

packaging uh area of that business the

18a uh pdk release this is sort of the

starting gun for people to start their

production designs and so we're seeing a

lot of energy and that area but overall

market conditions a little bit more

modest and I think outside of the AI

sector you've seen that in multiple

announcements Pat you know I followed uh

your journey at Intel from day one I've

followed Intel for a long time I to be

frank I was surprised by the dividend

cut and the capex cuts for this year and

next year now there's a lot of people in

this country rooting for your comeback

to be that Beacon of Hope to make chips

in the country but how do you I guess

quiet their concerns that you know is

running out of time to turn itself

around and it won't be that Beacon of

Hope to make chips in the

country so you know as we laid out our

overall projects in the US and the chips

agreements they're all Milestone based

and we're comfortably inside of the

Milestones that we have so our plan to

build out us manufacturing unchanged we

continue to see great momentum with US

Government chips program office many

areas as that unique national champion

and many of those things are seeing very

good good progress in those areas so no

change in those plans the capex

reductions are very much focused on

building a more efficient Intel and

we've made many of the catch-up

Investments you know we radically

increased our Capital expansion and

capital Investments over the last

several years since I came back you we

had no shell capacity no sight capacity

we had to catch up on our process uh

technology so all of those Investments

are ones that we can now build on as we

build an efficient effective Foundry and

foundaries manage their capital

investment very carefully and as we have

laid out this new operating model of

Intel products and Intel Foundry we

should be scrutinizing those Capital

Investments carefully and that's the

decisions that we're making as we do

those and some of that adjustment is

just based on market conditions as well

where we see the growth rates in the

marketplaces so we could say our

strategy is unchanged we remain

committed to being that worldclass

Foundry stepping into that space for a

resilient supply chain for the world our

plans for our build outs our chips

Investments no change in those even as

we make these near-term adjustments to

be a more efficient supplier for the

future you mentioned the headcount

reduction Pat 15% that's a large number

um 15 16,000 people uh how concerned are

you that that reduction will will impact

the culture of Intel and then slow up

the turnaround at the company

you know given that we've now I say

gotten our process and product in place

we feel like we're in a position that we

can make these next steps we are doing

that clean sheet work of what a

world-class Foundry looks like what a

worldclass fabulous company looks like

and those efforts to clean sheet the

company are showing that we have many

areas of inefficiency we were still

built like a IDM 1.0 as we've said this

integrated company so being able to

separate those and look at best and

class companies has identified many of

those inefficiencies so I need to change

the culture to be focused in those areas

and these steps are consistent with that

building on the momentum of the last

three years they're also surgical you

know we're looking business by business

function by function what do we do in

GNA and sales how do we do our

development what's the best in class in

the industry for each one of those Which

business areas do I need to go up which

business areas am I over investing in so

we'd say all of this is healthy for a

sustainable Intel for the long term even

though it's challenging in the near term

and something we don't consider this you

know modestly we consider this very

seriously these are members of the Intel

family we're going to treat them with

dignity and respect even as we go

through these changes lastly Pat um for

investors who maybe don't know you like

you and I have talked for for some time

to be clear you take delivering a

quarter like this and news like this

which some people have not seen before

from Intel pretty seriously I you've

were at the company for a long period of

time for many years have came back to

turn the company around this is not

something where you I imagine you take

lightly delivering news like

this uh in no way uh sazy you know I

grew up at the feet of Grove noise and

more you know I feel as close to a

Founder that you possibly could of a 50

plus year old you know company this is

my company these are my people you know

this is the vision that we have laid out

to transform and rebuild a iconic you

know company this is what I signed up

for this is a challenging period and

with it none of this is easy none of

this is taken lightly we're going to

treat our people the right way but we're

going to build a sustainable Intel a

sustainable Intel in products and

technology and a sustainable Intel in

our financial performance as well that's

what the market expects of us you know

we have to have a company that's good

for the long term that's what we're

creating that's what we've signed up for

that's what I've signed up for and I'm

committed to finish the job that we

started