Intel expects the second and third quarter of this year to be the financial bottom of a turnaround meant to propel it back into the lead position in the semiconductor industry. That was one takeaway from the company’s Q2 conference call on Thursday.
Intel reported a surprise loss and a 22% decline in Q2 revenue year-over-year. It cited its own execution on certain programs as well as changing macro-economic conditions for consumers and businesses as contributing to the disappointing results.
On an adjusted basis earnings per share was 29 cents and well below Wall Streets expectations of 69 cents. Shares were down more than 10% at one point in after-hours trading.
“We are not satisfied with the quarter and the financial results,” said Pat Gelsinger on the call with Wall Street analysts. However, he told them he has growing confidence in the company’s strategy and is optimistic about the future.
“We deserve tough questions this quarter,” he said. “Transformations are not easy but nothing worthwhile every is.
Why Intel’s revenue dropped
In addition to macro economic changes, Gelsinger acknowledged execution was a big issue in the quarter. Timelines for a major product within the important datacenter group called Sapphire Rapids were pushed out into the beginning of next year after quality issues were found.
“This was not our finest hour in execution,” he said. “We are rebuilding the execution machine.”
Intel, which employs more than 21,000 people in Oregon, had been famous for its Tick-Tock production schedule that gave customers a predictable cadence of innovation. That however, went by the wayside several years ago. Gelsinger said some version of that predictability is coming back.
To do this the leadership team has been rebuilt and he has reintroduced OKRs across the company to drive common purpose and accountability. OKRs, or Objectives and Key Results, were first introduced to the business world by Intel’s famed CEO Andy Grove, whom Gelsinger worked under.
Some of the areas that are having execution challenges are programs that were well underway when Gelsinger returned to Intel last year. He told analysts he is confident in future programs because they are getting started under the new culture of discipline.
What is Intel’s comeback strategy?
Chief Financial Officer David Zinsner said the company is slowing its hiring and reducing capital expenditures in response to the challenging financial picture.
The company has exited the drone business as well as its Optane memory business, Zinsner said. Optane was based on technology the company developed jointly with Micron Technology called 3D XPoint.
“There are opportunities to improve in two areas: allocating capital to the programs that are clearly aligned to the business strategy and offer maximum long-term value to shareholders … and drive structural production costs and expenses across the company,” Zinsner said. “My history is in memory (chips) where every penny counts. I know areas to improve maximum output per dollar.”
The company is sticking to its long-term plan for transformation based on manufacturing prowess. It still intends to hit parity with rivals by 2024 and take leadership in 2025.
Executives highlighted the ramp of Intel 7, the third version of what had been called 10 nanometer. It expects to start volume production of its next generation chip, Intel 4, in the second half of the year and reiterated that it is on schedule for subsequent products Intel 3, 20A and 18A. Once Intel gets into 20A and 18A chips it is making products smaller than a nanometer. (For reference, a strand of human DNA is 2.5 nanometers in diameter).