In an urgent response to a declining financial outlook, Intel Corporation has unveiled a comprehensive cost-cutting strategy valued at $10 billion, a plan deemed "badly needed" following the release of its disappointing quarterly earnings report. According to analysis from Truist Securities, Intel's latest figures reveal a stark contrast between expectations and reality, forcing the company to reassess its operational strategies moving forward.
On Thursday, Intel reported adjusted earnings of merely $0.02 per share for the second quarter, a significant drop from $0.13 per share recorded a year earlier. Revenue followed suit, declining from $12.95 billion to $12.83 billion. These results fell short of Wall Street expectations, which anticipated earnings of $0.10 per share and a revenue of $12.98 billion.
Intel's CEO, Pat Gelsinger, characterized these results as "disappointing," highlighting heightened challenges anticipated during the second half of the year. Truist analyst William Stein underscored the company's struggles, attributing a considerable portion of the disappointing results to new export restrictions imposed by China, which adversely affected the company's client computing group (CCG).
Furthermore, Intel's gross and operating margins did not live up to market forecasts. Stein elaborated that while Intel cited various factors impacting performance, including lackluster revenue and a higher cost exposure from noncore businesses, the principal issue stemmed from shifting production timelines at its Ireland fabrication facility.
This decision was made to curtail near-term expenditures while accelerating the rollout of artificial intelligence personal computers (AI PCs). For the current quarter, Intel anticipates an adjusted loss of $0.03 per share, with revenue projected between $12.5 billion and $13.5 billion. This forecast sharply contrasts with market projections of a $0.31 profit on revenue of $14.43 billion.
Gelsinger noted that a modest inventory adjustment in the CCG segment, alongside other markets performing below initial forecasts, is expected. Following these developments, Truist has revised its price target for Intel shares from $33 down to $25, while maintaining its hold rating. The immediate reaction in trading was severe, as Intel's stock plummeted 26% on Friday and has seen a staggering 57% decline over the year.
The newly proposed cost-cutting plan stipulates a reduction in headcount by more than 15%, with the majority of layoffs expected to conclude by year-end. Starting in Q4, the company will also suspend its dividend payouts. Gelsinger reiterated the company's commitment to enhancing profitability and capital efficiency, aiming to realize savings exceeding $10 billion by 2025.
As these restructuring initiatives take shape, Intel remains poised for a potential resurgence in growth driven by AI PCs, despite continued short-term challenges in the X86 processor market stemming from the capital expenditure shifts towards AI technologies. Stein concluded that while the long-term advantages of product efficiency and the profitability associated with a foundry operation are clear, navigating the current landscape of challenges will require a steadfast approach from Intel's leadership..