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The recent quarter saw Intel partially rebound from a dip in demand for PC chips, driven by inventory-related issues. This positive performance has given Wall Street cause for celebration as the struggling US chipmaker works towards stabilizing its business and completing a four-year turnaround plan. Intel’s shares rose over 7% in after-market trading, resulting in a total gain of 36% this year. Although sales of PC chips dropped by 12% to $6.8bn in Q2, it was a better outcome than the anticipated 21% decline and a significant improvement from the 38% collapse in Q1.
However, while the PC market is expected to return to normal trading conditions in the second half of the year, there will be an inventory overhang impacting Intel’s data center business. According to David Zinsner, the CFO, this overhang will persist for the remainder of the year. Despite this, Intel still predicts a modest recovery in the second half and their revenue guidance for the current quarter aligns with analysts’ expectations.
Intel has been losing market share to its smaller competitor, AMD, in data center central processing units. The surge in demand for generative artificial intelligence has raised concerns about whether data center customers will divert some of their spending from CPUs, which are general-purpose processors made by Intel and AMD, to purchase more graphics processing units (GPUs). NVIDIA currently leads the market in GPUs, and Zinsner noted that there may be a shift in spending towards GPUs in the latter half of the year. However, he emphasized that the inventory correction would have a greater impact on the data center business.
Furthermore, Intel’s profit margins rebounded more than expected from the Q1 collapse. Higher sales contributed to a gross margin increase of over two percentage points, reaching almost 40%. Cost-cutting measures led to an operating margin of 3.5%, a 6-point improvement from the previous quarter. Intel’s efforts to address the cash drain resulting in negative free cash flow of over $9bn in Q1 have also shown progress. Lower capital spending and improved inventory management reduced the outflow to less than $3bn in the latest quarter.
In terms of financials, Intel reported revenue of $12.9bn for Q2, a 15% decline compared to the previous year. On a pro forma basis, earnings dropped from 28 cents to 13 cents per share. This outcome exceeded Wall Street’s expectations of $12.1bn in revenue and a loss of 4 cents per share.
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