Intel factory losses are mounting as the company plots a costly comeback

By | April 3, 2024

(Bloomberg) — Intel Corp. revealed new details about its manufacturing operations, saying losses in the chipmaker’s factory network have increased and the company may not reach a breakeven point for several years.

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Intel Foundry, a new division of the company responsible for manufacturing, had revenue of $18.9 billion in 2023, up from $27.5 billion the year before, the company said late Tuesday. Operating losses at the new unit increased from $5.2 billion to $7 billion.

Intel fell more than 4% in extended trading after the earnings release. Shares were down 1.3% to $43.94 in regular trading Tuesday, bringing their year-to-date decline to 13%.

Intel is providing a more detailed look at its finances as part of an ambitious turnaround plan from CEO Pat Gelsinger. He is announcing the results of the factory network as a step to make it operate more independently. The company is trying to make chips for other companies, and separating the company somewhat from the rest of Intel is essential to that strategy.

The company’s new timeline and financial targets highlight the challenges this effort will entail, including investing billions of dollars in new factories.

“We believe this transparency and accountability are necessary,” he said during a presentation. “The required transformation is in full swing.”

The company expects 2024 to be the peak of its losses and that Intel Foundry will be profitable at an operational level “by the mid-to-late 2030s.” The chipmaker also appointed Lorenzo Flores as the division’s Chief Financial Officer.

Intel’s push into outsourced chip manufacturing – known as the foundry industry – is one of the company’s biggest transformations in its history. Gelsinger’s comeback also includes restoring Intel’s once unassailable technological lead – something the chip pioneer lost in the years before taking the reins in 2021.

Intel’s struggles have forced the company to outsource the production of some key components, Gelsinger revealed in the presentation. The country now buys about 30% of its silicon wafers, he said. But by improving Intel’s technology — using a technique called extreme ultraviolet lithography — the company plans to bring more of this production back in-house, he said.

The CEO reiterated his claim that Intel will regain its technological lead next year. Over time, this will improve the capabilities of Intel’s products and make them cheaper to produce. It will also allow the company to win orders from competitors, something that will generate as much as $15 billion in sales by the end of 2030, Gelsinger said.

Intel said there are five such companies committed to using the latest manufacturing technique, called 18A. It will be more widely used from next year and gain momentum thereafter, the company said.

Taiwan Semiconductor Manufacturing Co. currently dominates the foundry market and has eclipsed Intel in total revenue. That company had 2023 revenues of $69.4 billion and net income of $26.9 billion. The gross margin – the percentage of turnover that remains after deduction of production costs – was 54%. And sales are expected to grow 20% to $83.4 billion by 2024.

Intel’s biggest rival in its traditional business is Advanced Micro Devices Inc., which had revenue of $22.7 billion and net income of $854 million last year. The gross margin was 50%. This year, according to analysts, the company is on track for a 14% increase in sales.

Nvidia Corp. has quickly become the star of the industry. Although it doesn’t yet have the revenue of TSMC, revenue more than doubled last year – and stratospheric profits are expected again this year. The company has a leading edge in the market for artificial intelligence accelerators, which help companies develop AI models.

Intel has embarked on a record expansion of its factories in the US and Europe, taking advantage of government incentives such as the Chips and Science Act. But even with that support, it’s an expensive venture that has investors on edge.

The company cabled earlier this year that its manufacturing finances are “under significant pressure” as the chipmaker tries to rebuild its technological capabilities and build out its infrastructure.

Chief Financial Officer Dave Zinsner, who answered analyst questions with Gelsinger on Tuesday, acknowledged there is plenty of room for improvement. But separating the manufacturing group — and treating the company’s product division as a customer — has already paid dividends, he said. There has been a huge reduction in expensive requests for expedited work and test chips, he said.

The company has also scored some customer wins. In February, Intel announced that Microsoft Corp.’s internal chip design business would be closed. will become a customer for the foundry sector. Gelsinger has said he is ahead of schedule when it comes to signing up other clients, but he cannot name them because they do not want to go public.

(Updates with management comments in sixth paragraph.)

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