Intel stock plunges as company announces cost-cutting plan to slash jobs, suspend dividend

Chip giant Intel (INTC) reported its second quarter earnings after the bell on Thursday, missing on the top and bottom lines and announcing a $10 billion cost reduction plan to cut 15% of its workforce and suspend dividend payments. In a release, Intel said it expects Q3 revenue of between $12.5 billion and $13.5 billion, well short of analysts’ expectations of $14.3 billion.

Shares of the chipmaker plummeted more than 16% on the news.

Intel is in the midst of a massive turnaround effort as it seeks to regain market share lost to rival AMD (AMD) while working to build out its AI chip and third-party foundry businesses. All of this comes as the PC market is in the early stages of a recovery after eight consecutive quarters of declines following the explosive growth the industry experienced at the onset of the COVID-19 pandemic.

The company reported earnings per share (EPS) of $0.02 on revenue of $12.8 billion. Analysts were looking for EPS of $0.10 and revenue of $12.9 billion. The company saw EPS of $0.13 on revenue of $12.9 billion in the same quarter last year, according to analyst estimates compiled by Bloomberg. The chipmaker is also expected to lay off thousands of workers in the coming days, according to Bloomberg. The company is spending billions of dollars on factories and other facilities around the world as it seeks to reclaim its share of the chip manufacturing industry, which is dominated by Taiwan Semiconductor (TSMC).

Intel’s Data Center and AI segment brought in $3.05 billion in the quarter, below expectations of $3.07 billion. The data center and AI business offers Intel a chance to grow its revenue thanks to the massive demand for CPUs and GPUs to power AI applications. But Intel’s GPUs aren’t as in demand as Nvidia’s (NVDA), which are seen as the best overall chips for AI processing. Shares of Intel are off 38% year to date versus AMD, which is down just 3.7%. Nvidia shares are up 127%.

While data centers and AI get the most attention, Intel’s client segment, which includes sales of chips for enterprise and consumer computers, is still its largest overall business.

For the quarter, Intel saw client revenue of $7.4 billion. Wall Street was anticipating revenue of $7.5 billion. The company saw client revenue of $6.7 billion in the same quarter last year. Intel, however, is facing a potentially existential threat in the PC space from an unlikely source: Qualcomm (QCOM). The company, which is better known for developing chips for smartphones and tablets, released its new Snapdragon X Elite PC chip as part of Microsoft’s new Surface Laptop and Surface Pro in May.

Intel said on Thursday it would cut more than 15% of its workforce, some 17,500 people, and suspend its dividend starting in the fourth quarter as the chipmaker pursues a turnaround focused on its money-losing manufacturing business.

It also forecast third-quarter revenue below market estimates, grappling with a pullback in spending on traditional data centre semiconductors and a focus on AI chips, where it lags behind rivals.

Shares of Santa Clara, California-based Intel slumped 20% in extended trade, setting the chipmaker up to lose more than $24 billion in market value. The stock had closed down 7% on Thursday, in tandem with a plunge in U.S. chip stocks after a conservative forecast from Arm Holdings on Wednesday. AI powerhouse Nvidia and smaller rival AMD ticked up after hours, underscoring how well-positioned they were to take advantage of the AI boom and Intel’s relative disadvantage.

“I need fewer people at headquarters, more people in the field, supporting customers,” CEO Pat Gelsinger told Reuters in an interview, talking about the job cuts. On the dividend suspension, he said: “Our objective is to… pay a competitive dividend over time, but right now, focusing on the balance sheet, deleveraging. ” Intel, which employed 116,500 people as of June 29, excluding some subsidiaries, said the majority of the job cuts would be completed by the end of 2024. In April, it declared a quarterly dividend of 12.5 cents per share.

Intel is in the middle of a turnaround plan, focused on developing advanced AI processors and building out its for-hire manufacturing capabilities, as it aims to recoup the technological edge it lost to Taiwan’s TSMC, the world’s largest contract chipmaker. The push to energize the contract foundry business under Gelsinger has increased Intel’s costs and pressured profit margins. More recently, the chipmaker has said it will cut costs.

On Thursday, Intel announced it would cut operating expenses and reduce capital expenditure by more than $10 billion in 2025, more than it initially planned.

“A $10 billion cost reduction plan shows that management is willing to take strong and drastic measures to right the ship and fix problems. But we are all asking, ‘Is it enough, and is it a bit of a late reaction considering that CEO Gelsinger has been at the helm for over three years?” said Michael Schulman, chief investment officer of Running Point Capital.

The company had cash and cash equivalents of $11.29 billion and total current liabilities of about $32 billion as of June 29.

The push to energize the contract foundry business under Gelsinger has increased Intel’s costs and pressured profit margins. More recently, the chipmaker has said it will cut costs.

On Thursday, Intel announced it would cut operating expenses and reduce capital expenditure by more than $10 billion in 2025, more than it initially planned.

“A $10 billion cost reduction plan shows that management is willing to take strong and drastic measures to right the ship and fix problems. But we are all asking, ‘Is it enough, and is it a bit of a late reaction considering that CEO Gelsinger has been at the helm for over three years?” said Michael Schulman, chief investment officer of Running Point Capital.

The company had cash and cash equivalents of $11.29 billion and total current liabilities of about $32 billion as of June 29.

Cutting Capex

Analysts believe Intel’s plan to turn around the foundry business will take years to materialize and expect TSMC to maintain its lead in the coming years, even as Intel has ramped up production of AI chips for personal computers. The PC chip business grew 9% in the April-June quarter.

“The irony is that… their first AI PC-focused processors are selling much better than expected. The problem is that the costs for those chips are much higher, meaning their profitability on them isn’t great,” said Bob O’Donnell, chief analyst at TECHnalysis Research. “In addition, the data center decline reinforces the fact that while companies are buying lots of infrastructure for AI, the vast majority is for non-Intel GPUs,” he said, referring to graphic processing units like those sold by Nvidia.

Intel’s data center business declined 3% in the quarter.

CFO David Zinsner said on a post-earnings call that the chipmaker expects weaker consumer and enterprise spending in the current quarter, especially in China.

Export licenses that were revoked in May also hurt Intel’s business in China in the second quarter, he said. Intel said in May its sales there would take a hit after Washington revoked some of the chipmaker’s export licenses for a customer in China.

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