Intel announces cost reduction plan, expects to reduce tile production outsourcing to TSMC in 2026

Intel has unveiled a cost reduction plan involving significant layoffs, substantial cuts in operating expenses, and a sharp reduction in capital expenditures (capex). The announcement comes as the company projects a weak financial outlook. Intel plans to ramp up in-house chip manufacturing and decrease its reliance on outsourcing to TSMC in 2026.

Intel has announced its second-quarter financial results, with revenue totaling US$12.83 billion, down 0.9% YoY. The gross margin decreased to 38.7%, compared to 39.8% in the same period last year.

Total revenue for Intel Products at US$11.80 billion, falling short of the US$12 billion estimate. Client Computing revenue reached US$7.41 billion, below the anticipated US$7.53 billion. Datacenter & AI revenue was US$3.05 billion, while Network & Edge revenue came in at US$1.34 billion.

Intel Foundry reported revenue of US$4.32 billion. Additionally, Altera contributed US$361 million, and Mobileye generated US$440 million in revenue.

According to Intel CFO Dave Zinsner, Intel's gross margin fell short due to three main factors: the rapid ramp-up of AI PC products, a costly transition of Intel 4 and Intel 3 wafers to a high-volume facility in Ireland, and increased period charges for non-core businesses and unused capacity. Additionally, competitive pricing and an unfavorable product mix also impacted margins.

The company has projected third-quarter revenue between US$12.5 billion and US$13.5 billion, missing analysts' average estimate of US$14.38 billion, according to Bloomberg data. The gross margin is expected to be 38%, down 7.8 percentage points from the previous year.

According to Bloomberg Intelligence, Intel's significant sales, margins, and EPS shortfall for both second-quarter results and the third-quarter outlook indicates that turnaround challenges may last longer than expected. The suspension of dividends and planned headcount reduction further reflect a lack of confidence in a swift recovery in sales or improvement in cash flow pressures.

Cost reduction plan

Intel CEO Pat Gelsinger outlined plans to boost profitability and capital efficiency by over US$10 billion by 2025. The company is targeting a reduction in headcount of more than 15% by the end of 2025. Operating expenses (opex) are expected to drop to approximately US$20 billion in 2024, with a further reduction to US$17.5 billion in 2025—over 20% below previous estimates. Additional opex declines are anticipated for 2026.

Intel will suspend dividend payments beginning in the fourth quarter to bolster cash flows. The company has consistently paid dividends since 1992.

Gross capex for 2024 is now forecasted to range between US$25 billion and US$27 billion, reflecting a reduction of over 20% from earlier plans due to anticipated softer demand in the second half of the year. Gross capex for 2025 will be lower at US$20-23 billion.

Segmental outlook

Gelsinger indicated that the third quarter will be impacted by inventory adjustments in the Client Computing Group (CCG) and weaker performance in the Data Center and AI Group (DCAI), Network and Edge Group (NEX), Altera, and Mobileye, with results falling below initial forecasts. Despite these challenges, the outlook for the fourth quarter remains positive, with revenue expected to grow at the higher end of the typical seasonal range, aided by improved client inventory levels.

In the Intel Foundry division, the company is progressing with the ramp-up of Intel 4 and Intel 3 technologies and preparing Intel 20A for production next quarter. The Intel 18A Process Design Kit (PDK) was released last month, with manufacturing-ready status expected by year-end and production volumes anticipated in the first half of 2025.

However, Intel Foundry reported a sequential increase in operating losses, totaling US$2.8 billion. The company anticipates these losses to continue at a similar rate in the third quarter, primarily due to high costs associated with pre-EUV nodes and significant investments in advanced technology development, including the Intel 4 and Intel 3 facilities in Ireland.

Increasing in-house production starting from 2026

UBS analyst Timothy Arcuri inquired about Intel's foundry strategy following a recent reduction in capex. He questioned how Intel plans to execute its strategy with lower spending, especially with conflicting reports about increasing in-house wafer production versus outsourcing to TSMC.

In response to the Intel Foundry strategy following a reduction in capex, Gelsinger said Intel's overall foundry strategy remains unchanged despite the capex reduction.

He said capital investment plans have been adjusted to reflect current market forecasts, shifting from aggressive expansion to optimizing existing investments. This involves refining capital utilization and enhancing efficiency with equipment suppliers.

The company is concluding its aggressive build-out phase, including investments in EUV lithography, and is now focusing on effectively leveraging these investments through 2024, 2025, and 2026.

Intel is seeing early success in advanced packaging with foundry customers, a sector requiring less capital compared to wafer production. This aligns with Intel's strategy to lead in advanced packaging technology.

The foundry capacity will primarily support Intel Product needs. Significant benefits from bringing external wafer production in-house are anticipated to emerge in 2026, with improvements in process technology and product leadership expected from 2025.

AI PC

Gelsinger said that Intel's next-generation AI PC, Lunar Lake, achieved production release ahead of schedule and is set to drive a major device refresh. Lunar Lake offers superior performance with 50% better graphics, 40% more power efficiency, and 3x more TOPs compared to its predecessor. Microsoft has certified Lunar Lake for over 80 new Copilot+ PCs from over 20 OEMs, with shipments starting this quarter.

Following Lunar Lake, Intel will launch Arrow Lake next quarter to bring AI advancements to desktops, and Panther Lake is set for release next year to further extend Intel's leadership.

Gelsinger added that Intel's Gaudi 3, launching in the third quarter, promises to significantly enhance performance while being two-thirds the cost of competitors. Gaudi 3 is expected to deliver twice the performance per dollar compared to H100 and has strong support from major ecosystem partners like Dell, HP, Lenovo, and others.

Source: Intel, August 2024

Source: Intel, August 2024

Source: Intel, August 2024