As the first of the three chip giants to report, Intel released Q3 earnings after hours yesterday, and the stock plunged nearly 9%. Intel blew up again?
Intel Q3 Earnings Summary:
Q3 revenue $19.192B, up 4.7% year over year, down 2.2% sequentially; excluding NAND, revenue $18.087B, up 4.8% year over year, below prior guidance of $18.2B; Q3 non-GAAP gross margin 57.8%, up 1.3 pct year over year, 2.8 pct above guidance; Q3 net income $6.823B, up 59.6% year over year and 34.8% sequentially; Q3 non-GAAP net income $6.997B, up 53.9% year over year.
At first glance it looks decent—many metrics are up, even net income growing over 50%, very un-Intel-like.
The reality: net income includes $1.7B in investment gains (vs. $56M a year ago) and an absurd 0.4% tax rate (vs. 15.2% a year ago). Intel's Q3 operating income was $5.227B, up only 3% year over year, a truer reflection of the quarter's performance.
Data Center Bottoms as Expected, but Cloud Market Keeps Being Eaten by AMD
Data center remains the key Intel watchpoint. Intel's data center had disappointed for four straight quarters, decoupling from the sector, while NVIDIA and AMD data center revenues kept hitting records.
Good news: Intel Q3 data center did bottom and rebound. Leading indicator Inventec's Q3 revenue rose 28.3% year over year, ending a four-quarter slump. We predicted yesterday in the Preview that Intel Q3 data center revenue could rise 15% year over year to $6.8B, up slightly sequentially. Actual revenue was $6.496B, up only 10% year over year.
Intel Q3 data center shipments finally ended three straight quarters of year-over-year declines, and ASP ended four straight quarters of year-over-year declines. Data center operating margin ticked up to 31.7% but remains near historical lows.
But that doesn't mean Intel's data center is back. Intel had guided for enterprise and cloud recovery in Q3, but cloud revenue actually plunged 20% year over year, the fourth straight quarter of 15%+ declines. Combined with AMD EPYC winning hyperscaler orders, AMD's data center CPU continues to take share from Intel.
PC Weak! Notebook Shipments Unexpectedly Down 14%
In yesterday's preview, we noted that since late last year both Intel and AMD have been constrained by ABF substrate shortages, both prioritizing capacity for data center. In the Q1 call, management guided for PC to decline sequentially in the second half; AMD also guided for flat PC sequentially.
But TSMC's recent Q3 earnings shifted expectations. TSMC's HPC business hit a quarterly record in Q3, growing sequentially for the third straight quarter, reaching 37% of revenue. HPC customers are mainly AMD and NVIDIA; combined with 7nm rising to 34% of TSMC's Q3 revenue, this implies both companies maintained high utilization in Q3. (NVIDIA's TSMC 7nm is data center; AMD's TSMC 7nm is PC + data center.)
Intel delivered a different story: Q3 PC revenue $9.664B, down 1.9% year over year, first time below $10B in a year. PC operating margin 34.3%, down for the third straight quarter, a low since Q2 2020.
The drag is the notebook business, currently the most important PC segment. Intel Q3 notebook shipments fell 14% year over year, the first decline since 2020. ASP rose 10% year over year, ending four straight quarters of declines. Q3 desktop was stronger, with shipments up 16% year over year and ASP up 4%, achieving volume and price growth. The recently strong networking and peripheral business plunged 35% year over year in Q3.
Falling Behind Means Getting Beaten
Intel's Q3 performance is a joke against the red-hot semiconductor supercycle. Q4 guidance calls for revenue down 3% year over year excluding NAND, likely the only Philadelphia Semiconductor Index component guiding for a decline.
Although Intel still leads in revenue and net income scale, with 117,000 employees globally and a bargain-bin valuation, the market only cares about the future, not past glory. Abandoned by Apple, haunted by AMD's competitive shadow. Tech is brutal: when ahead, Intel squeezed toothpaste; now that it's behind, catching up requires double the investment with no guarantee of success.
Intel's CEO says future investment will increase, sacrificing margins. Will the market give them a chance?