Intel announced plans to lay off more than 15% of its workforce, equivalent to around 17,500 employees, and suspend its dividend starting in the fourth quarter. The decision comes as the company anticipates third-quarter revenue to fall below market expectations, facing challenges in the traditional data center semiconductor market while trying to catch up in the AI chip sector, where it lags behind competitors.
The announcement led to a 20% drop in Intel's shares during extended trading, translating to a loss of over $24 billion in market value. This decline followed a 7% drop earlier in the day, which was part of a broader slump in US chip stocks spurred by a conservative forecast from Arm Holdings.
Despite Intel's struggles, other chipmakers like Nvidia and AMD saw their shares rise after hours, reflecting their stronger positions in the AI market. Intel's CEO, Pat Gelsinger, emphasized the need for a shift in workforce distribution, with fewer people at headquarters and more in the field supporting customers. He also noted the dividend suspension as part of efforts to focus on the balance sheet and reduce leverage.
Intel's current workforce stands at 116,500, excluding subsidiaries. The majority of the job cuts are expected to be completed by the end of 2024. The company had declared a quarterly dividend of 12.5 cents per share in April.
Gelsinger's turnaround plan for Intel focuses on developing advanced AI processors and expanding its for-hire manufacturing capabilities to regain the technological edge it lost to Taiwan's TSMC, the world's largest contract chipmaker. However, this push has increased costs and pressured profit margins. Intel has announced plans to cut operating expenses and reduce capital expenditures by more than $10 billion by 2025, exceeding initial expectations.
Michael Schulman, chief investment officer of Running Point Capital, remarked that while the $10 billion cost reduction plan shows strong measures are being taken, there are concerns about whether it is sufficient and if it is a late response, given that Gelsinger has been CEO for over three years.
As of June 29, Intel had $11.29 billion in cash and cash equivalents and total current liabilities of about $32 billion. The company's lagging position in the AI chip market has contributed to a more than 40% decline in its shares this year.
For the third quarter, Intel expects revenue between $12.5 billion and $13.5 billion, below analysts' average estimate of $14.35 billion. It also forecast an adjusted gross margin of 38%, falling short of market expectations of 45.7%.
Analysts believe Intel's efforts to turn around its foundry business will take years, with TSMC expected to maintain its lead. Despite this, Intel's PC chip business grew by 9% in the April-June quarter. However, the higher costs associated with AI PC-focused processors mean their profitability isn't great. Additionally, Intel's data center business declined by 3% in the quarter.
CFO David Zinsner noted that weaker consumer and enterprise spending, particularly in China, is expected in the current quarter. Export licenses revoked in May have also impacted Intel's business in China.
Intel plans to cut capital expenses by 17% in 2025, aiming for $21.5 billion, based on the midpoint of its forecast range. These costs are expected to remain roughly flat in 2024.
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