Intel Q2 Earnings Results: Chipmaker Chases AI Opportunity Amid Inventory Glut

‘Effective execution across our process and product roadmaps is rebuilding customer confidence in Intel,’ CEO Pat Gelsinger said on the call.

Intel reported a profitable quarter thanks to its aggressive savings plan while detailing some of the opportunity ahead in artificial intelligence during the chipmaker’s Thursday quarterly earnings call.

The Santa Clara, Calif.-based chipmaker reported $12.9 billion in revenue for the quarter ended July 1, a decrease of 15 percent year over year but exceeding the high end of Intel’s prior guidance. Intel reported a net income of $1.5 billion for the quarter and $2.8 billion in cash from operations.

Vendor executives identified some continuing areas of weakness during the call, on which they reported results for the second fiscal quarter, ended July 1.

“Effective execution across our process and product roadmaps is rebuilding customer confidence in Intel,” CEO Pat Gelsinger said on the call. “Strength in client and data center and our efforts to drive efficiencies in cost savings across the organization all contributed to the upside in the quarter and a return to profitability.”

[RELATED: Intel Seeks To Win Over AI Developers With Open-Source Reference Kits]

Intel 2Q Results

He continued: “We remain committed to delivering on our strategic roadmap, achieving our long term goals and maximizing shareholder value.”

Intel traded at about $37 a share, up about 8 percent after hours.

Softness And Weakness

Gelsinger identified the server market as “soft” during the second quarter, “with persistent weakness across all segments, but particularly in the enterprise and rest of world where the recovery is taking longer than expected across the entire industry.”

In response to an analyst question, Gelsinger explained that, “It’s a little bit of data center digestion for the cloud guys, a bit of enterprise weakness, some of that is more inventory. And the China market … hasn’t come back as strongly as people would have expected overall.”

Intel Chief Financial Officer David Zinsner told listeners on the call that the chipmaker reduced net inventory by $1 billion.

Easing central processing unit (CPU) inventories will continue into the second half of the year as “the near-term wallet share focus on AI accelerators rather than general purpose compute in the cloud,” he said. “We expect Q3 server CPUs to modestly decline sequentially before recovering in Q4.”

“There’s some inventory burn that we’re still working through,” Gelsinger said. “We do see that big cloud customers in particular have put a lot of energy into building out their high-end AI-training environments. And that is putting more of their budgets focused or prioritized into the AI portion of their build out. That said, we do think this is a near-term surge that we expect will balance over time.”

Still, in Intel’s client business, Gelsinger said that original equipment manufacturers and channel partners are “at healthy inventory levels” with “solid demand signals for the client business from our OEMs and even some of the end of quarter and early quarter sale-through are clear indicators of good strength in that business.”

And Intel is “well-positioned” to gain share with its accelerator products portfolio – including Gaudi, Flex and Max – in 2024 and beyond, he said. The “pipeline of opportunities through 2024” is more than $1 billion.

The Intel AI Opportunity

Intel saw benefits from AI start to manifest in the second quarter, Gelsinger told listeners on the call. The chipmaker is positioning itself as the deliverer of beneficial total cost of ownership (TCO) at every node on the AI continuum.

“Our strategy is to democratize AI, scaling it and making it ubiquitous across the full continuum of workloads and usage models,” he said. “We are championing an open ecosystem with a full suite of silicon and software IP to drive AI from cloud to enterprise, network, edge and client, across data prep, training and inference in both discrete and integrated solutions.”

AI-enabled PCs are “a critical inflection point for the PC market over the coming years that will rival the importance of Centrino and Wi-Fi in the early 2000s,” Gelsinger said, referring to Intel’s brand of wireless computer networking adapters.

“AI is a workload where you might spend 10 megawatts and months training a model – but then you’re going to use it very broadly for inferencing,” he said. “We do see with a (Intel next generation processor) Meteor Lake ushering in the AI PC generation, where you have tens of watts, they will be responding in a second or two. And then AI is going to be in every hearing aid in the future – including mine – where it’s 10 microwatts and instantaneous. So, yeah, we do see that AI drives workloads across the full spectrum of applications. And for that, we’re going to build AI into every product that we build.”

Despite the short-term focus on AI accelerators, AI should prove a market expander for server CPUs, Gelsinger said.

Even Nvidia’s DGX, described by Gelsinger as the leading edge AI platform, includes CPUs, he said.

Intel has seen benefits for the AI capabilities in its fourth generation offerings, as well as examples of CPUs providing best results for use cases such as graph neural networks and AlphaFold by DeepMind, a sister company of Google.

“We feel optimistic about the long-term outcome opportunities that we have in data center … even as, near term, we’re working through some of the challenging environments of the market not being as strong as we would have hoped,” Gelsinger said.

Intel Q2 In Detail

Gross margin shrank less than a percentage point to 35.8 percent. And its operating margin fell 3.2 percentage points to -7.8 percent.

The vendor is on its way to $3 billion in 2023 cost savings, according to Intel executives. Intel spent 12 percent less in research and development and general and administrative expenses, spending $5.5 billion during the quarter.

Looking at each unit, the Client Computing Group (CCG) brought in the lion’s share of revenue with $6.8 billion during the quarter, down 12 percent year over year.

Data Center and AI (DCAI) brought in $4 billion during the quarter, a decrease of 15 percent year over year. Network and Edge (NEX) brought in $1.4 billion during the quarter, a decrease of 38 percent year over year.

Mobileye brought in $454 million during the quarter, a decrease of 1 percent year over year. Intel Foundry Services (IFS) actually grew more than fourfold during the quarter, bringing in $232 million.

Intel Q3 Guidance

Zinsner told listeners that Intel expects third fiscal quarter revenue between $12.9 billion and $13.9 billion with a gross margin of 43 percent.

“We expect client CPU shipments to more closely match sell-through,” he said. “Data center, network and edge markets continue to face mixed macro signals and elevated inventory levels in the third quarter, while IFS and Mobileye are well positioned to generate strong sequential and year over year growth.”

Proactive investment in shells and aligning equipment purchases to customer demand should help Intel continue to expand while controlling costs, he said. Intel recently closed agreements with Poland and Germany for “significant capital incentives.” The chipmaker is also “well-positioned to meet the requirements of funding laid out by the U.S. Chips Act.”