Intel is experiencing contrasting fortunes in the current landscape of the semiconductor industry. In its recent report on Thursday, the computer-chip giant disclosed a 10% year-over-year increase in revenue for the fourth quarter of 2023, accompanied by a 6.5-point rise in gross margin. However, the full-year results for 2023 revealed a 14% decline in total revenue compared to 2022, with total gross margin slipping from 42.6% to 40%.
When compared to industry counterparts like Taiwan Semiconductor Manufacturing and Nvidia, boasting 2023 gross margins of 54% and 73% respectively, Intel is grappling with challenges in cost management.
Yet, a comprehensive examination of the quarterly and full-year 2023 results unveils a tale of diverging paths for Intel's two critical business units: CCG (client products) and DCAI (data center and AI infrastructure products).
Intel's client group stands out as the cash cow, consistently delivering revenue to sustain and foster new business units and product lines. The fourth quarter of last year showcased remarkable performance for the client group, with a 33% increase in revenue and a staggering 450% surge in operating income, soaring from $500 million to $2.9 billion compared to the same period a year earlier.
The turnaround was attributed to a "healthier alignment" with inventory situations, a concern prevalent over the past couple of years. The outlook for 2024 presents a growth opportunity for client products, particularly in the laptop and desktop CPU chips segment. Intel's recent launch of Core Ultra chips for the AI PC market anticipates a positive response from consumers, paving the way for potential growth.
Despite industry analysts predicting a "supercycle" of PC upgrades in the second half of 2024, driven by the shift of AI computing from the cloud to local PCs, the demand for AI PCs currently appears subdued. The enthusiast technology audience, often regarded as a leading indicator of tech trends, exhibits limited interest in "AI for AI's sake," with a patient wait for a compelling moment to trigger the buying cycle.
In the realm of AI PC space, Intel faces competition from AMD and Qualcomm, both offering quality chips with integrated AI accelerators. Startups like MemryX, providing add-on AI chips, further intensify the competitive landscape. Intel must strive for performance excellence and leverage its channel influence to establish the best software ecosystem for its components.
While optimism surrounds the client side of Intel's business, questions arise for the data-center and AI infrastructure business unit. With a 10% year-over-year drop in revenue and a 38% decrease in operating income, the operating margin stands at 2%. Intel acknowledged challenges in the "CPU addressable market," citing significant competitive pressures on earnings. Despite Intel's Xeon CPU retaining dominance in the data-center CPU chip space, the company faces difficulties capitalizing on the AI computing trend. Unlike Nvidia, Intel's data-center GPU products struggle to gain traction, and the Gaudi line of AI accelerators lacks significant design wins or partnerships that indicate imminent sales growth.
While AMD projects substantial revenue from its MI300 AI server chip in 2024, Intel's apparent lack of a counterplan is worrisome. A recent leadership change in this business unit signals a recognition of the challenges, but it is not an instant solution to Intel's AI issues.
During the earnings call Q&A, Intel's CEO, Pat Gelsinger, highlighted a shift in focus for AI in 2024, emphasizing more on AI inference than training. The CFO, David Zinsner, offered a positive sign by mentioning a "$2 billion pipeline" for Intel's "discrete accelerator portfolio" for 2024. Although not equivalent to official revenue projections, this pipeline suggests a potential for Intel to make headway in the data center AI space.
The network and edge business unit (NEX) witnessed a 24% year-over-year revenue drop, and the foundry services business (IFS) increased revenue but still incurs losses.
The upcoming year will be pivotal for Intel as it navigates challenges and charts its course for the latter half of the decade. The company, once considered unassailable, faces the question of whether it can regain its prominence under Gelsinger's leadership, offering excellence in both manufacturing and products. The competitive landscape with companies like Nvidia, AMD, and Qualcomm poses challenges that Intel must address to avoid continued setbacks.
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