Intel finally saw the dawn of profitability.
On July 28, Beijing time, Intel announced its financial report for the second quarter of fiscal year 2023. The data showed that the company’s performance exceeded market expectations. Once the financial report was released, Intel’s stock price rose by 6.6% on the second trading day, and finally closed at $36.83.
(Source: Futu Niu Niu)
Compared with the first quarter of fiscal year 2023, which has set the lowest quarterly revenue in 13 years and suffered continuous losses, Intel's revenue decline in the second quarter has eased, and it has successfully reversed the loss situation, and the recovery trend is gradually emerging.
What deserves special attention is the development trend of Intel's IFS business. While other businesses are still showing a more or less downward trend, the revenue of Intel's IFS business has surged, and it is the only business that has risen against the trend among all business segments. So, in the IFS business, what did Intel do right? In future development, how to maximize the value of chip manufacturing?
The decline in performance is gradually fading, and the potential of IFS, which carries the vision of transformation, is gradually emerging?
The financial report shows that Intel’s revenue in the second quarter of fiscal year 2023 was US$12.9 billion, a year-on-year decrease of 15%; its net profit was US$1.5 billion, successfully reversing its first-quarter loss. In addition, the earnings per share attributable to Intel was US$0.35, and the gross profit margin was 35.8%, a year-on-year decrease of 0.7 percentage points.
It is worth mentioning that, before this, neither Intel itself nor the market was “optimistic” about the company’s performance in the second quarter. Intel’s first-quarter financial report estimated that the second-quarter revenue would be US$11.5-12.5 billion, and the market’s average estimate was US$11.75 billion. , and the current revenue of $12.9 billion can be called a "surprise" performance.
In terms of business, CCG revenue was US$6.8 billion, a year-on-year decrease of 12%, and a month-on-month increase of 17.91%; DCAI revenue was US$4 billion, a year-on-year decrease of 15%, and a month-on-month increase of 8.11%; NEX revenue was US$1.4 billion, a year-on-year decrease of 38% , decreased by 6.67% month-on-month; the mobile eye business achieved US$454 million, a year-on-year decrease of 1%, and a month-on-month decrease of 0.87%; IFS revenue was US$232 million, a sharp increase of 307% year-on-year and a month-on-month increase of 96.61%.
It can be seen that it is mainly the CCG, DCAI, and IFS sectors that have helped Intel's revenue exceed expectations.
(Source: Company financial report)
Specifically, in recent years, factors such as the fading of online office dividends and declining demand have affected the sales of PC products, resulting in Intel's core business CCG still on a downward slope. However, with the passage of time, the PC consumer side has recovered slightly. According to Canalys data, global PC shipments in the second quarter of 2023 reached 62.1 million units, a year-on-year decrease of 11.5%. Compared with the decline in shipments in the previous two quarters by more than 30%, the decline has slowed down. In this context, CCG revenue is also recovering after bottoming out.
In order to reduce the drag on the performance of the decline of the PC market, Intel has opened up many new business segments on the way to seek transformation in recent years. Among them, as a new segment carrying Intel's development ambitions in the chip industry, the development of IFS has attracted much attention from the market. It can also be seen from the latest data in the second quarter that although the IFS business accounts for a small proportion, its development is very strong, and behind the substantial increase in revenue is a huge and growing market.
At present, the global chip foundry business market is more than 100 billion US dollars. According to data from Persistence Market Research, by 2030, the value of the foundry business is expected to exceed 200 billion US dollars. In order to gain a leading position in chip manufacturing, Intel has also continuously strengthened its layout in recent years, providing customers with system-level foundry services in terms of wafer manufacturing, advanced packaging, chips, and software, opening up a larger market. In this quarter, with the further release of market demand, Intel's additional packaging transactions and sales of IMS nanofabrication tools increased, driving the rapid development of Intel's IFS business.
In addition to business improvement, Intel's continued actions to reduce costs and increase efficiency have also increased its profitability. According to the financial report, Intel's operating expenses (R&D, general affairs and administration) in the second quarter were US$5.5 billion, a year-on-year decrease of 12%.
Based on the good development trend in the second quarter, Intel is full of confidence in its future development. The company expects revenue in the third quarter of 2023 to be approximately US$12.9 billion to US$13.9 billion, the highest value is higher than analysts’ previous forecast of US$13.28 billion; the estimated gross profit margin is 39.1%, achieving a quarter-on-quarter recovery.
(Source: Company financial report)
From this point of view, Intel seems to have really embarked on the road of performance recovery. However, the company also said it expects "sustained weakness" in all business segments through the end of the year, with server chip sales not recovering until the fourth quarter. It can be seen that Intel's turnaround from loss to profit is still in its early stages, and it needs to start from a business that has more room for growth and is conducive to cost reduction and efficiency increase if it wants to achieve sustainable profitability.
Given that the PC market is still recovering slowly, it is not realistic for Intel to open up profit margins in this field as soon as possible. In contrast, the strong development potential of the IFS business has already been demonstrated. Therefore, one of Intel's follow-up development focuses is to increase chip foundry, which is also its continuous practice of IDM 2.0 strategy. However, in the face of leading players such as TSMC and Samsung, can Intel successfully break through?
IDM 2.0 stage core making has become a heavy task, the industry is expected to reshuffle?
For a long time, as a strong barrier to the industry, chip manufacturing capability has been one of the focuses of market competition. In order to enhance R&D capabilities and consolidate its own advantages, and further challenge other powerful competitors in the industry such as TSMC and Samsung, Intel has also continued to strengthen its "core-making" capabilities in recent years. The opening of the IFS business segment also symbolizes its "core-making" ambition .
Behind the IFS business is a more ambitious vision, that is, the IDM 2.0 strategy, which includes three aspects: globalizing the internal factory network; expanding the use of third-party foundry capacity; creating a world-class foundry business.
With the support of this strategy, Intel has been making continuous moves recently. First, it announced a new business model in June this year, planning to operate its chip manufacturing business independently and start reporting profits. The goal of large wafer foundries. Moreover, the financial report also disclosed that Intel will invest US$4.6 billion, US$25 billion and US$33 billion in Poland, Israel and Germany respectively to establish chip manufacturing plants. This investment scale even exceeds the previous US chip subsidy bill of more than US$50 billion. It can be seen that its determination to increase chip manufacturing is great.
However, high investment also means high risk. On the one hand, the market positions of the two giants TSMC and Samsung are stable. According to data, in the first quarter of this year, TSMC’s share in the global foundry field exceeded 60%. Although Samsung’s share has declined significantly, it still has 12.4%. In contrast, Intel's competitive advantage is not significant due to a slight delay in layout.
On the other hand, as the demand for consumer electronics such as PCs and smartphones continues to weaken, the prosperity of the semiconductor foundry industry is no longer as prosperous as it was during the bonus period of previous years. A major feedback to the production side is that production capacity is no longer in short supply, and the decline in output value has also led to a narrowing of the performance of leading companies such as TSMC and Samsung. Data show that in the first half of 2023, TSMC's revenue fell by 3.5% year-on-year, and its net profit fell by 11.6% year-on-year; Samsung's second-quarter revenue fell by 22.28% year-on-year, and the operating profit of the semiconductor business was -4. The giants were hit hard.
So, under the multiple challenges, why does Intel still choose to expand against the trend, and even plans to split the IFS business into an independent operation?
In fact, the current chip foundry production cycle has eased compared to the past, and the competition among chip manufacturers has also entered a cooling-off period. It can be said that it just gave Intel the opportunity to expand production and accumulate energy.
In addition, the split of the IFS department is also an important step in Intel's strategy of reducing costs and increasing efficiency. Intel stated that the internal business unit will establish a "customer-supplier" relationship with the chip manufacturing business unit, which means that Intel's past internal chip production will be converted into revenue and generate corresponding profits, and the IFS business unit will be split into independent operations It also helps control costs. It is understood that after Intel splits IFS, it can save US$3 billion in costs within the year and increase the profit margin by 6%. It is expected to save US$8-10 billion by 2025.
As far as the manufacturing process is concerned, Intel also has a certain competitive advantage. The transistor density of its 7nm process has reached 180 million per square millimeter, far exceeding Samsung's 3nm process. In addition, according to the financial report, Intel is steadily advancing the four-year five-process node plan. At present, Intel 7 has achieved mass production, Intel 4 has also begun to increase the production of Meteor Lake, and the production of Intel 3, 20A and 18A is also on schedule. Plan to implement.
Taken together, Intel's series of initiatives does have its deep considerations and advantages. However, as mentioned above, compared with TSMC, Samsung and other giants, Intel’s position in chip manufacturing is not prominent, and TSMC and Samsung have also expanded production and other similar moves. For example, TSMC plans to expand production lines in the mainland market in Nanjing; Samsung plans to invest 1 trillion won to expand production of HBM and other actions, making Intel's follow-up breakthrough full of uncertainty. In addition, the increase in IFS in the early stage and the promotion of production expansion also mean that Intel's cost pressure is not small. In this case, Intel wants to shake the position of companies such as TSMC in the short term, and there is little hope of promoting the reshuffle of the industry. However, considering the current situation of Intel's chip foundry business that has emerged, Intel may be able to explore greater room for performance growth by continuing to increase IFS.
Author: Helen
Source: US Stock Research Institute