Intel Corporation (NASDAQ: INTC) announced significant restructuring plans on Thursday, revealing a 15% reduction in its workforce—amounting to approximately 17,500 employees—and the suspension of its dividend starting in the fourth quarter. The company aims to focus on turning around its struggling manufacturing business, which has been incurring substantial losses.
The announcement followed Intel’s release of its third-quarter revenue forecast, which fell below market expectations. The company has been facing a decline in spending on traditional data center semiconductors and has struggled to keep pace with competitors in the rapidly growing AI chip market. As a result, Intel’s shares plummeted 20% in extended trading, erasing over $24 billion in market value. The stock had already closed down 7% earlier in the day, influenced by a conservative forecast from Arm Holdings.
Despite the turmoil, the broader chip industry remained relatively unaffected. Competitors Nvidia (NASDAQ: NVDA) and AMD (NASDAQ: AMD) saw their shares tick up in after-hours trading, highlighting their stronger positions in the AI sector compared to Intel.
CEO Pat Gelsinger, in an interview with Reuters, emphasized the need for a leaner operation focused on supporting customers directly. “I need fewer people at headquarters, more people in the field,” Gelsinger said. Regarding the dividend suspension, he noted the company’s priority is to strengthen its balance sheet and reduce leverage.
Intel’s workforce, numbering 116,500 as of June 29, will see the majority of the job cuts completed by the end of 2024. The company had declared a quarterly dividend of 12.5 cents per share in April, which will now be suspended.
In its turnaround strategy, Intel is concentrating on developing advanced AI processors and expanding its for-hire manufacturing capabilities, aiming to regain its competitive edge over Taiwan’s TSMC (TWSE: 2330), the world’s largest contract chipmaker. This strategic shift has increased Intel’s costs and pressured profit margins, prompting the need for significant cost reductions.
On Thursday, Intel outlined plans to cut operating expenses and reduce capital expenditure by more than $10 billion by 2025, surpassing its initial projections. Michael Schulman, CIO of Running Point Capital, remarked on the drastic measures, questioning if they are sufficient and noting the timing of these actions, given Gelsinger’s three-year tenure as CEO.
As of June 29, Intel reported cash and cash equivalents of $11.29 billion and total current liabilities of approximately $32 billion. The company’s lag in the AI chip market has contributed to a more than 40% decline in its share value this year.
For the third quarter, Intel anticipates revenue between $12.5 billion and $13.5 billion, falling short of analysts’ average estimate of $14.35 billion. The forecasted adjusted gross margin of 38% also missed market expectations of 45.7%.
Analysts predict that Intel’s efforts to revamp its foundry business will take years to materialize, with TSMC expected to maintain its lead. Despite a 9% growth in Intel’s PC chip business in the April-June quarter, the profitability of its AI PC-focused processors remains a concern due to high production costs.
Intel’s data center business saw a 3% decline in the quarter. CFO David Zinsner attributed the weaker outlook for the current quarter to reduced consumer and enterprise spending, particularly in China. The revocation of export licenses in May further impacted Intel’s business in China.
In an effort to reduce expenses, Intel plans to slash capital expenditure by 17% year-on-year to $21.5 billion in 2025. The company expects capital costs to remain flat in 2024.
The market’s reaction to Intel’s announcement was swift and severe, with shares dropping over 19% to $23.47 per share in extended trading.
Intel’s turnaround efforts, highlighted by significant layoffs and cost-cutting measures, mark a pivotal moment in the company’s strategy to regain its footing in the competitive semiconductor industry.
