INTC • 10-K • FY 2024 • Positive

Intel's Foundry Pivot Shows Promise Amid Historic $7B Loss and AI Push

January 26, 2024 • 1 min read

TL;DR

Intel posted its first annual loss in decades (-$7B) while executing an ambitious foundry transformation and AI acceleration strategy. Revenue declined 14% YoY to $54.2B as PC market weakness persisted, though Q4 showed signs of stabilization. The company's IDM 2.0 strategy gained momentum with $10B+ in foundry design wins and strategic agreements with key customers. Management expects return to profitability in 2024 driven by $3B+ cost savings, improving PC demand, and early foundry/AI traction

Financial Performance Overview: Revenue declined 14% YoY to $54.2B with Client Computing (-23%) and Data Center (-20%) segments hit hardest. Gross margin compressed 890bps to 39.3% due to factory underutilization and pricing pressure. Operating loss of $7.1B reflects heavy investment in manufacturing capacity ($43B committed) despite weakened demand. Q4 showed sequential improvement with revenue up 10% QoQ to $15.4B and gross margins expanding 460bps QoQ to 45.7%, suggesting potential inflection point.
Strategic Initiatives and Operational Changes: Intel accelerated its IDM 2.0 transformation with $10B+ in foundry pipeline and key wins including Microsoft and AWS. The company reorganized into six business units, emphasizing foundry services and AI acceleration. $3B cost reduction program exceeded targets, with another $2B targeted for 2024. Five nodes in four years strategy remains on track with Intel 3 and 18A showing strong progress, though execution risks remain high.
Market Position and Competitive Dynamics: PC CPU share stabilized at 82% despite AMD gains in premium segments. Data center share declined 500bps YoY to 77% as customers diversify suppliers. Foundry business secured 50+ active engagements worth $10B+, validating competitive position vs TSMC. AI accelerator roadmap (Gaudi3, Falcon Shores) positions Intel to compete in $100B+ TAM, though significantly behind Nvidia. Leading-edge process technology showing competitive parity with TSMC for first time in years.
Operational Efficiency and Profitability: Gross margin hit multi-year low of 39.3% but showed sequential improvement to 45.7% in Q4. Operating expenses reduced by $1.5B through workforce reductions and portfolio optimization. Factory network utilization improved from 65% in Q1 to 75% in Q4. Investment phase peaks in 2024 with $43B committed to new fabs, creating significant operating leverage potential if demand recovers. Path to 60%+ gross margins requires successful foundry ramp and improved mix.
Growth Catalysts and Material Risks: Key growth drivers include PC refresh cycle (300M+ aged devices), AI server acceleration ($100B+ TAM by 2027), and foundry expansion ($10B+ pipeline). Material risks include execution on 5 nodes in 4 years roadmap, competitive pressure in data center, and macro uncertainty affecting capital spending. Management expects return to revenue growth and profitability in 2024, with longer-term target of $100B+ revenue by 2027.

Revenue

$54.2B ( YoY, QoQ in Q4)

↓ -14%

Rd Spend

$17.5B ( of revenue)

↑ 32%

Net Income

-$7.1B (vs +$8.0B in 2022)

Gross Margin

(-890bps YoY, +460bps QoQ in Q4)

↑ 39.3%

Free Cash Flow

$2.5B ( YoY)

↓ -68%

Operating Margin

(-2,810bps YoY)

↓ -13.1%

Growth Indicators

PC, Server (-500bps YoY)

↑ 82%

Foundry Pipeline $10B+ in design wins

Factory Utilization ↑75% in Q4 vs 65% in Q1

Key Risks

Process technology execution risk on 5 nodes in 4 years roadmap
Competitive pressure in data center from AMD and ARM
High fixed cost structure creating downside leverage
Geopolitical tensions impacting global manufacturing strategy

Key Opportunities

PC refresh cycle potential (300M+ aged devices)
AI server acceleration ($100B+ TAM by 2027)
Foundry services expansion ($10B+ pipeline)
Process technology leadership enabling market share gains

Bottom Line

Intel's 2023 results mark a critical inflection point in the company's transformation, with historic losses reflecting both cyclical challenges and strategic investment costs. The foundry strategy is gaining credibility with major customer wins, while process technology execution shows encouraging progress. Return to profitability likely in 2024 though pace of recovery remains uncertain. Success requires continued execution on technology roadmap while maintaining competitiveness in core markets. The contrarian case centers on potential for Intel to emerge stronger from transformation with sustainable technology leadership and expanded TAM, though risks to this thesis remain elevated.