INTC • 10-Q • Q1 2024 • Positive

Intel's Foundry Pivot Shows Promise as AI Drives 9% Revenue Growth

April 26, 2024 • 1 min read

TL;DR

Intel demonstrated early success in its foundry transformation strategy with Q1 revenue growing 9% YoY to $12.7B, driven by AI-related demand and improving PC market conditions. Foundry Services revenue surged 289% YoY, while gross margins expanded 670bps to 45.1%. The company secured major foundry customers including Microsoft and maintained its ambitious process technology roadmap. Management raised FY24 guidance, signaling confidence in sustained momentum despite ongoing execution challenges

Financial Performance Overview: Revenue grew 9% YoY to $12.7B, with Client Computing Group up 31% to $7.5B and Foundry Services surging 289% to $736M. Gross margin expanded 670bps YoY to 45.1%, though operating margin remained negative at -2.1%. Operating cash flow improved to $2.5B from -$4.3B year ago. The company maintained strong liquidity with $28.4B cash and investments while reducing inventory by $800M sequentially.
Strategic Initiatives and Operational Changes: Intel accelerated its IDM 2.0 strategy, securing Microsoft as a major foundry customer for advanced packaging services. The company remains on track with its five nodes in four years roadmap, with 18A development progressing ahead of schedule. Management restructured operations into six business units and implemented $3B cost reduction program. Key manufacturing investments in Arizona, New Mexico, and Germany continue with government support.
Market Position and Competitive Dynamics: Intel regained PC market share with 31% CCG growth outpacing the market. However, Data Center segment declined 10% YoY amid intense AI competition from NVIDIA and AMD. Foundry Services showed early traction with design wins from Microsoft, MediaTek, and others, though still trails TSMC significantly. The company's process technology roadmap aims to achieve manufacturing leadership by 2025 through 18A node.
Operational Efficiency and Profitability: Gross margin improvement of 670bps YoY reflects better capacity utilization and cost controls, though still below historical levels. Inventory reduction of $800M shows supply chain optimization progress. Operating expenses declined 11% YoY through restructuring efforts. Factory network optimization continues with $3B cost reduction program on track, though significant capex requirements remain for technology transitions.
Growth Catalysts and Material Risks: AI-driven demand and foundry expansion present major growth opportunities, with management forecasting >$1B foundry revenue in 2024. However, execution risks in process technology transitions and intense competition in AI chips pose challenges. Macro uncertainties and high capex requirements could pressure margins. Success in foundry business critical for long-term competitiveness.

Revenue

$12.7B ( YoY, QoQ) with strong CCG growth offset by Data Center decline

↑ +9%

Rd Spend

$3.8B ( YoY) representing of revenue

↓ -11%

Net Income

$1.5B (vs -$2.8B YoY) reflecting operational improvements

Gross Margin

(+670bps YoY) driven by improved utilization and mix

↑ 45.1%

Free Cash Flow

$1.0B (vs -$5.1B YoY) with improved working capital

Operating Margin

-2.1% (+900bps YoY) though still negative

Growth Indicators

$11.9B (-$800M QoQ)

Ccg Revenue ↑$7.5B (+31% YoY)

Foundry Revenue ↑$736M (+289% YoY)

Key Risks

Process technology execution delays could impair competitive position
AI market share losses may persist despite new product launches
Capital intensity of foundry transition strains financial flexibility
Geopolitical tensions threaten global manufacturing strategy

Key Opportunities

Foundry Services expansion targeting >$1B 2024 revenue
Advanced packaging leadership provides competitive differentiation
Process technology parity potential by 2025 through 18A node
AI acceleration market share recovery through new product portfolio

Bottom Line

Intel's Q1 results demonstrate early validation of its foundry-focused transformation strategy, though significant execution challenges remain. The combination of improving PC market conditions, foundry customer wins, and process technology progress suggests the company's competitive position is stabilizing. However, sustained success requires flawless execution of manufacturing roadmap while maintaining heavy investment levels. Key metrics to watch include foundry customer additions, process technology yields, and AI solution traction. The contrarian insight is that Intel's advanced packaging capabilities may prove more strategically valuable than pure manufacturing leadership in the evolving semiconductor landscape.