Intel, a giant in the semiconductor industry, made a bold announcement on Thursday: the company will be cutting over 15% of its workforce, amounting to approximately 17,500 employees, and will suspend its dividend starting in the fourth quarter. This move is part of a strategic turnaround aimed at reviving its struggling manufacturing business.
In addition to this, Intel projected a bleak third-quarter revenue forecast, falling short of market expectations. The company is grappling with reduced spending on traditional data center semiconductors while trying to catch up in the competitive arena of AI chips, where it currently lags behind its rivals.
The market reacted sharply to this news. Intel’s shares, based in Santa Clara, California, plummeted 20% in extended trading, resulting in a potential loss of more than $24 billion in market value. The stock had already closed down 7% earlier that day, reflecting a broader sell-off in U.S. chip stocks following a conservative forecast from Arm Holdings.
Despite Intel’s grim outlook, the broader chip industry remained relatively unscathed. AI powerhouse Nvidia and smaller competitor AMD saw their stocks tick up in after-hours trading, highlighting their advantageous positions in the burgeoning AI market compared to Intel’s struggles.
In an interview with Reuters, CEO Pat Gelsinger addressed the job cuts, stating, “I need fewer people at headquarters, more people in the field, supporting customers.” On the suspension of dividends, he commented, “Our objective is to eventually pay a competitive dividend, but right now, our focus is on the balance sheet and deleveraging.”
Intel, which employed 116,500 people as of June 29, plans to complete the majority of these job cuts by the end of 2024. The company had declared a quarterly dividend of 12.5 cents per share in April.
Gelsinger has been steering Intel through a significant transformation, emphasizing the development of advanced AI processors and expanding its manufacturing capabilities for external clients. This strategy aims to regain the technological edge lost to Taiwan’s TSMC, the world’s largest contract chipmaker.
However, this ambitious push has increased Intel’s costs and squeezed profit margins. More recently, Intel has committed to cost-cutting measures. On Thursday, the company announced plans to reduce operating expenses and capital expenditure by more than $10 billion in 2025, exceeding initial projections.
Michael Schulman, Chief Investment Officer of Running Point Capital, remarked, “A $10 billion cost reduction plan shows that management is willing to take strong and drastic measures to right the ship and fix problems. But we are all asking, ‘is it enough’ and is it a bit of a late reaction considering that CEO Gelsinger has been at the helm for over three years?”
As of June 29, Intel reported having $11.29 billion in cash and cash equivalents, against total current liabilities of about $32 billion. The company’s shares have fallen over 40% this year, largely due to its lagging position in the AI chip market.
For the third quarter, Intel anticipates revenue between $12.5 billion and $13.5 billion, falling short of analysts’ average estimate of $14.35 billion, according to LSEG data. The company also forecast an adjusted gross margin of 38%, well below market expectations of 45.7%.
Analysts predict that Intel’s efforts to revamp its foundry business will take years to bear fruit, with TSMC likely to maintain its lead. Despite ramping up production of AI chips for personal computers, Intel’s position in this market remains weak.
Ironically, Intel’s first AI PC-focused processors have been selling better than expected. However, Bob O’Donnell, Chief Analyst at TECHnalysis Research, noted, “The problem is that the costs for those chips are much higher, meaning their profitability on them isn’t great.”
In the data center sector, Intel’s business declined by 3% in the last quarter. CFO David Zinsner highlighted that weaker consumer and enterprise spending, particularly in China, is expected to impact the current quarter further. Export licenses revoked in May also adversely affected Intel’s business in China, as sales took a hit after Washington’s decision.
Moreover, Intel is scaling back investments. It plans to reduce capital expenditures by 17% in 2025, bringing it down to $21.5 billion, based on the midpoint of its forecast range. These costs are expected to remain roughly flat in 2024.
In conclusion, Intel’s sweeping changes reflect its struggle to adapt to a rapidly evolving semiconductor landscape. With substantial job cuts, halted dividends, and a rigorous cost-cutting plan, the company is making a concerted effort to regain its footing and compete in the high-stakes world of AI technology.
