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Bad Times For Intel. Will They Last Forever?

It’s been a very bad few weeks for Intel. The company announced dismal financial results for 2022 including a $664 million net loss for the year, a 32% year-over-year revenue decline for Q4, and a 20% decline in annual revenue year over year. A year ago, the net profit was $4.62 billion. That’s a year-over-year profit swing of negative $5.284 billion. The company’s sales fell quarter by quarter during the entire year. Intel would only forecast one quarter ahead in its latest financial report and the forecast is also dismal: $10.5 to $11.5 billion in quarterly revenue – versus $14 billion in revenue for Q4 2022 – with negative earnings per share of 80 cents.

Intel published these financial results on January 26, 2023. On February 1, reports of salary cuts at Intel started to appear in multiple sources including Reuters and The Oregonian. (Intel has sizeable manufacturing operations in Oregon.) According to these reports, mid-level managers will see a 5% pay cut, VPs get 10% cuts, and the executive leadership team took a 15% cut. Employees at lower pay grades won’t see pay cuts, but the company is cutting its 401K matching contributions by 50% and has cut merit raises and quarterly bonuses as well. CEO Pat Gelsinger is taking a 25% cut on his base pay, but his base pay is a very small percentage of his overall compensation package. However, it’s quite likely that Gelsinger’s bonuses and stock compensation will also be severely reduced by these financial results.

Intel’s pay cuts come on top of layoffs that have reportedly been taking place since October of last year. Truly, these are dark financial times for Intel. Meanwhile, the company’s archrival, AMD, fared better for the quarter and managed to eke out a profit.

So, might this be the end for Intel? Hardly. The company knew it was in trouble when it brought Gelsinger back on board to be CEO in early 2021. At that time, Gelsinger saw that the company’s vaunted process leadership position had eroded and that its flagship x86 processors were not keeping pace with AMD’s latest Epyc and Ryzen server and client CPUs, which put revenue and margins in peril. From the day he started as CEO, Gelsinger started rebuilding the Intel airship while it was in flight.

One of Gelsinger’s first moves was to transfer Intel’s semiconductor manufacturing and packaging operations to a newly created Intel Foundry Services (IFS), in a program called IDM 2.0. (IDM means “integrated device manufacturer.”) IFS would open the company’s chipmaking capabilities to outside customers. Coincident with that announcement, Gelsinger and IFS started making aggressive moves towards expanding Intel’s existing semiconductor fabs and building new fabs, packaging facilities, and semiconductor R&D facilities – a lot more – in Ohio, Oregon, Arizona, New Mexico, France, Germany, Israel, and Ireland. In addition, Intel is attempting to acquire Tower Semiconductor, a semiconductor manufacturer with a storied history and complementary capabilities. Wherever possible, Intel has sought tax cuts and funding from governments in the US and internationally to fund this expansion program.

While the IDF strategy opens a new revenue stream for Intel – making and packaging custom devices for outside customers – Gelsinger likely has a far more powerful motive in mind. Back when Intel started, the term “semiconductor manufacturer” and IDM meant the same thing, because being “fabless” wasn’t a thing. Today, most semiconductor companies are fabless. It’s the semiconductor foundries, especially TSMC, that are bringing the biggest semiconductor manufacturing advances to market. Gelsinger realized that Intel would have to compete directly with these foundries to regain its process technology leadership. Hence IFS.

Next, Intel has embraced heterogeneous semiconductor manufacturing: the assembly of packaged semiconductor devices using multiple die, or “tiles” in Intel-speak, also referred to as chiplets. Used for years to manufacture Intel FPGAs starting with the Stratix 10 family, heterogeneous packaging is now employed in Intel’s Ponte Vecchio GPU designed for HPC applications and in the just-announced Sapphire Rapids server CPU – now formally named the 4th Generation Intel Xeon Scalable and Intel Xeon CPU Max Series CPUs. Heterogeneous packaging permits the mix-and-match use of semiconductor die from different process technologies and even different foundries to manufacture finished devices. It’s one of the foundational technologies that allow Gelsinger to assert that Moore’s Law isn’t dead.

For these and other reasons, it’s very hard to write Intel off as a has-been semiconductor maker. The company simply has too much going for it. Intel’s situation is reminiscent of another time, more than 50 years ago, when a bad economy had Hewlett-Packard (HP) on the ropes. The economic downturn of 1970 had caused HP’s orders to fall. As a result, the company’s finished-goods inventory had risen by one third over the previous 12 months. The company needed to trim production to meet the reduced demand. HP’s founder and president Bill Hewlett took the unprecedented move of cutting everyone’s pay by 10% by announcing the “nine-day fortnight,” which meant that all employees would be paid for only nine days in every two-week period. In the July, 1970 issue of HP’s internal newsletter “Measure,” Hewlett wrote:

“The traditional way of dealing with this would simply be to lay off ten percent of the people. But I don’t feel that would be a very fair way. Certainly it is not in keeping with the philosophy under which HP has operated for many years…

“Now, this is not the traditional industrial approach, but I am not concerned by the lack of tradition here. I think it is an equitable way and one that each employee can understand, although, obviously, it will be a difficult situation for a number of people.

There were other ways we might have divided up the extra time off. But giving it all at one time, one full day in conjunction with a weekend, seemed to be the most beneficial and least detrimental to all of our people.”

Hewlett’s move kept HP mostly intact during those dark days and, as a result of his actions, the company flourished as the 1970s rolled on.

The halcyon days of HP’s fabled “no-layoff” policy are long gone – no company does that any more – but Tirias Research believes that Intel is at a similar crossroads. The company is suffering financially at the moment. There’s little doubt about that. The latest financial results make it abundantly clear. However, the company knew that there would be lean years coming before it brought Gelsinger in as CEO. And Gelsinger immediately started to prepare the company for getting through these times. Turning an aircraft carrier like Intel isn’t done overnight. The company’s businesses are complex and retooling semiconductor fabs and processes takes time.

Intel started on its multi-year retooling two years ago. So far, the company has wholeheartedly embraced EUV lithography and delivered on new process nodes. It appears that success record will continue at least through Intel 4 and 3, the next two process nodes due to go into production. Architecturally, the accelerator-heavy design of the new 4th Generation Intel Xeon Scalable CPU marks a gamble on the future of the data center, a market that’s very near and dear to Intel’s heart… and the company’s revenue stream.

Gelsinger was mentored by Intel’s legendary CEO Andy Grove, who said, “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.” Grove also said, “If you’re wrong, you will die. But most companies don’t die because they are wrong; most die because they don’t commit themselves.” Gelsinger has often said that he’s bringing Grovian culture back to Intel. Clearly, he’s committed. Now, it’s time for Grove’s protégé to show what he can do.