“Intel’s been so busy looking for its chips that it forgot to stay on top of the chip game. Looks like the ‘Intel Inside’ slogan might need an update to ‘Intel Insight: Where Did We Go Wrong?'” – Anonymous
Intel, once the undisputed leader in the semiconductor industry, finds itself at a critical juncture following the sudden departure of CEO Pat Gelsinger on Dec 2, 2024. This unexpected turn of events has left many wondering: Did Intel fail its own digital transformation? I have written about business bumps caused in large corporations (e.g. GE) when they fail their own digital transformation efforts – https://platform9.com/blog/what-we-can-learn-from-ge-and-why-digital-transformations-fail/.
Jason Prelow over at ZDNet [1] takes a deep look at the non financial reasons behind Gelsinger’s exit and Intel’s slow downfall.
Intel – By the Numbers circa end of 2024
Intel, once a dominant force in the semiconductor industry, is facing significant challenges in its turnaround efforts. The company’s recent performance, particularly in Q3 2024, has been underwhelming, with missed opportunities in the AI and foundry sectors. Despite a 30% recovery from its August 2024 low, Intel’s stock has underperformed both the broader market and its semiconductor peers. The company’s restructuring efforts, including layoffs and reduced capital expenditure, stand in stark contrast to its competitors’ increased investments during the AI boom. Intel’s ambitious $100 billion foundry plan may further strain its already concerning financial situation, characterized by high net debt levels and negative Free Cash Flow generation.
The company’s struggles extend beyond financials, with Intel losing market share in the x86 market and facing increasing competition from ARM-based PCs. Its foundry prospects remain speculative, with reports of manufacturing process issues adding to the uncertainty. Analysts expect FY2024 to be a tough year for Intel, with only a modest recovery projected by FY2026.
Financial Challenges to Intensify in 2025
As noted, Intel’s financial performance in Q3 2024 highlights the company’s ongoing struggles. The semiconductor giant reported a 6% year-over-year decline in sales and shifted from an adjusted earnings per share (EPS) of $0.41 in the previous year to a loss of $0.46 per share this year. These results have contributed to the company’s declining stock performance.
The primary source of Intel’s difficulties lies in its third-party foundry business, launched in 2021 as a growth initiative. Contrary to expectations, this division has been accumulating substantial losses. In Q3, the foundry segment experienced an 8% year-over-year revenue decrease to $4.4 billion, while its operating losses expanded dramatically from $1.8 billion to $5.8 billion. This figure includes a $3.1 billion impairment charge, but even excluding this, the loss would have still increased to $2.7 billion.
To address these challenges, Intel is restructuring its foundry business into an independent subsidiary. This move is aimed at improving customer service and attracting external funding. It may also pave the way for a potential future spin-off of the division.
Looking ahead, Intel anticipates an improvement in the foundry business’s operating loss for the coming year. This optimism is based on the transition to new nodes with more favorable cost structures and the realization of savings from ongoing restructuring efforts.
However, the company faced a potential setback when reports suggested that the Biden administration was considering reducing Intel’s previously announced $8.5 billion CHIPS Act grant. This news came alongside the announcement of a $6.6 billion grant awarded to rival Taiwan Semiconductor Manufacturing for U.S.-based foundry construction. The final decision, revealed last Tuesday, allocated $7.86 billion to Intel, slightly less than initially proposed. This grant is in addition to the $3.3 billion Intel had already secured through a Department of Defense contract funded by the CHIPS Act.
Intel’s diversification efforts have faced challenges. The Altera division, which focuses on programmable logic devices, experienced a significant 44% year-over-year revenue decline. However, it showed some signs of recovery with a 14% sequential increase and a return to profitability, albeit small. Intel is considering spinning off this business through an IPO in the future.
Concurrently, Mobileye, Intel’s autonomous driving technology subsidiary, reported an 8% decrease in revenue. These performance issues suggest that Intel’s acquisitions of both Altera and Mobileye have not yet delivered the expected value, raising questions about the company’s acquisition strategy and its ability to successfully integrate and grow these businesses.
These developments underscore the ongoing challenges and evolving landscape Intel faces as it strives to regain its competitive edge in the semiconductor industry.
So Why is Intel in troubled waters?
For decades, Intel dominated the chip market, but recent years have seen the company struggle to keep pace with rapid technological advancements and fierce competition. The company’s challenges raise important questions about the nature of digital transformation in the tech industry and the consequences of falling behind.
1. Missed Opportunities in Mobile and AI
Intel’s failure to capitalize on the mobile revolution and the subsequent AI boom has been a significant setback. While competitors like ARM and NVIDIA have thrived in these areas, Intel has struggled to gain a foothold, missing out on crucial market opportunities.
2. Manufacturing Woes
Once a leader in chip manufacturing, Intel has faced persistent delays in advancing its manufacturing processes. This has allowed competitors like TSMC to surge ahead, eroding Intel’s technological edge.
3. Loss of Key Customers
Intel’s manufacturing struggles have led to the loss of important customers. Apple’s shift to its own silicon for Macs and Amazon’s development of its own chips for AWS are prime examples of this trend.
4. Lack of Agility
In a rapidly evolving tech landscape, Intel’s size and traditional focus have sometimes hindered its ability to pivot quickly and address new market demands.
5. Cultural Challenges
Transforming a large, established company like Intel requires not just technological changes but also cultural shifts. The company has struggled to foster the innovation and agility needed in today’s fast-paced tech environment.
6. Financial Pressures
As noted above, Intel’s financial performance has been under pressure, with the company facing declining revenues and market share in key segments. This has made it harder to invest in the research and development needed for true transformation.
7. Leadership Instability
The sudden exit of CEO Pat Gelsinger, following a string of leadership changes in recent years, highlights the challenges Intel faces in establishing a consistent strategic direction.
How Can Intel Right itself, if even?
While these factors paint a challenging picture, it’s important to note that Intel still has significant strengths and opportunities. Despite not being a standout performer, Intel’s core product business remains robust. This segment is projected to generate approximately $12.6 billion in operating income for the current year. While not spectacular, the core business continues to be a significant contributor to Intel’s overall financial performance. The company’s vast resources, strong brand, and deep expertise in chip design and manufacturing provide a foundation for potential recovery.
Here are the four main ways for Intel to right itself:
1. Innovate in AI and Advanced Computing:
Focus heavily on developing competitive AI chips, accelerators, and advanced computing solutions to capture market share in growing sectors like data centers, edge computing, and machine learning.
2. Revitalize Manufacturing Capabilities:
Accelerate the development of advanced process nodes, consider strategic partnerships with leading foundries, and improve foundry services to regain technological leadership and attract high-profile customers.
3. Diversify and Strengthen Product Portfolio:
Expand into new markets such as automotive chips and IoT devices, while also reinvigorating the PC market strategy with innovative architectures and features that differentiate Intel from competitors.
4. Strategic Restructuring and Partnerships:
Streamline operations, increase R&D investment in key areas, form strategic partnerships or consider acquisitions to quickly gain expertise in lagging areas, and rebuild brand trust through improved communication and delivery on promises.
Conclusion
One hopes that Intel’s journey is far from over, and with the right strategy and execution, the company still has the potential to reinvent itself. However, its current struggles serve as a stark reminder of the challenges involved in digital transformation, even for the most established players in the tech industry.The story of Intel serves as a cautionary tale for other tech giants. It underscores the importance of continuous innovation, agility, and the willingness to cannibalize one’s own success to stay ahead in the fast-paced world of technology.