Intel reported after hours yesterday, broadly in line with yesterday's Preview: a modest cyclical recovery but still underperforming the industry.
Intel Q2 Earnings Summary:
Total revenue including NAND $19.631B, down 0.5% year over year, down 0.2% sequentially.
GAAP gross margin 57.1%, up 3.8 pct year over year.
Net income $5.061B, down 0.9% year over year, up 50.6% sequentially.
Data Center Remains Weak, AMD and NVIDIA to Be Big Winners
Data center remains the key Intel watchpoint. Intel's Q2 data center differed slightly from our preview: we had predicted continued double-digit year-over-year decline; actual decline was 9.3%.
However, Intel's data center trend still tracks Inventec, which remains a reliable leading indicator.
Turning to Intel's data center business, Q2 revenue was $6.455B, down 9.3% year over year but up 16% sequentially, beginning to recover. Notably, however, operating profit fell 37% year over year, with an operating margin of 30.1%, indicating a severe downtrend.
Specifically, the government and enterprise business ended three consecutive quarters of year-over-year declines exceeding 20%; its recovery was the primary growth driver for Intel's data center segment in Q2. In contrast, the cloud customer business posted double-digit year-over-year declines for three straight quarters, falling 20% year over year in Q2.
Worse still, Intel's data center shipments declined year over year for three consecutive quarters in Q2, while ASP fell year over year for four straight quarters. The official explanation cites intensifying competition and the 7nm ramp; as for who benefits from the competitive pressure, that goes without saying.
Intel's data center has been weak for four straight quarters, decoupling from the sector, while AMD's data center revenue, deeply tied to NVIDIA, keeps hitting records.
Although on the earnings call Intel's CEO repeatedly emphasized that the data center would grow double digits year over year in the second half and announced the split of DCG into several units—Data Center AI, Network & Edge, and Accelerated Computing & Graphics—demonstrating a determination to go all-in on data center, the market cares more about the Sapphire Rapids delay.
Desktop sees rare recovery, but notebook ASP falls year over year for fourth straight quarter
Intel's Q2 PC business revenue was $10.109B, up 6.5% year over year and down 4.7% sequentially, accounting for 51.5% of revenue and maintaining its position as the largest segment.
In detail, Q2 notebook revenue grew 15% year over year, desktop revenue grew 11% year over year; notebook shipments surged 40% year over year, marking the fourth consecutive quarter of year-over-year growth above 20%, yet ASP fell 17% year over year, also the fourth straight quarterly decline. Tiger Lake shipments were the biggest contributor this quarter, but Apple's sharply lower Wi-Fi and CPU shipments also impacted Intel.
Meanwhile, desktop shipments ended five quarters of decline, showing a rare recovery, with ASP remaining stable.
Overall, the PC boom continues, with notebooks remaining the main driver. Intel's CEO also stated that the global PC TAM will continue to rise in 2022 and that we are still in the early stages of the PC supercycle. However, Intel's guidance calls for a sequential decline in PC in the second half.
Second-half guidance is optimistic, but the inflection point has yet to arrive
Because first-half results were unimpressive, Intel management has been emphasizing second-half performance.
Excluding the NAND business, Q3 guidance: revenue up 5% year over year, gross margin 55%, down 1.5 ppt year over year; EPS $1.10, up 2% year over year;
And again raised full-year guidance: Excluding NAND business, revenue $73.5B, up 1% year over year; gross margin 56.5%, down 2.9 ppt year over year; EPS $4.80, down 6% year over year
As the world's largest semiconductor company by revenue, Intel will almost certainly remain the only Philadelphia Semiconductor Index component to post a year-over-year decline in Q2.
Interestingly, Intel CEO Pat Gelsinger brought his former VMware CTO colleague Greg Lavender to Intel as CTO, tasked with software ecosystem strategy, underscoring Intel's reform resolve and a strategic pivot toward a combined hardware-software ecosystem.
Does that sound familiar? The changes Intel is making are essentially what NVIDIA has been doing all along, especially when the Intel CEO noted that the AI market is expected to achieve a 20% annualized growth rate.
