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Intel Let the Chips Fall Where They Might

This day always comes. It is the nature of monopoly and hubris.

It came for IBM. It came for Microsoft, and it is coming for Facebook. It will come for Google and, even though it is hard to believe, it will come for Amazon. And it is most assuredly coming for Intel right now, and it is probably going to get worse. Maybe not as bad as IBM in the early 1990s – because nothing was worse than that self-inflicted and self-described “near-death experience,” where Big Blue had the biggest write-offs in corporate history and eventually had to lay off half of its 400,000 workforce – but most assuredly for Intel, bad nonetheless.

Intel’s problems are not intractable, but they are incredibly expensive to fix, which is why the company is panhandling for money in the halls of the US Congress and in the corridors of power in Brussels, and why it is reportedly considering hooking up with private equity and hedge fund firms to raise the money to revitalize its foundries and therefore, it is hoped, its central compute engine business that, quite frankly, Intel’s former top brass took for granted. But it is worse than that. The chip design part of Intel took the foundry business as a given and the foundry part of Intel took the chip design business as a given, and AMD, the Arm collective (including homegrown Arm chips from cloud builders), and Nvidia have been doing all of the real taking – mostly of market share in compute. Given the roadmaps Intel has laid out and the substantial competition Intel is facing, they are going to keep taking it out of Intel’s hide as they ramp up new chippery and spend money to buy more manufacturing capacity from Taiwan Semiconductor Manufacturing Co.

And so, Intel finds itself in a real fight for its life, luckily with the best person possible, former chief technology officer and Data Center Group general manager and for the past year and a half, chief executive officer Pat Gelsinger, firmly in charge and knowing what must be done. The question is: Can Gelsinger afford to make the fixes that need too get done?

Not if you look at Intel’s current balance sheet and the prospects it has for a continued weak – and possibly progressively weakening – financial condition. Hence the panhandling and fast talking. And when this is all done, Intel might be saved, but there is no way in hell that it can be the same Intel it was before. It will be gun-shy, like IBM has been for decades, and it will be beholden, which is like having your guns taken away. At some point, if Intel’s stock gets hammered enough, it might even be tempted to pull a Michael Dell maneuver and take Intel private so it can try to heal without so many eyes watching the process. But we think that no private equity firm will believe that Intel’s historical profit margins will ever return.

Let’s get this straight: They won’t. Period.

Intel can get its foundry in order and make a reasonable profit being a second source for all kinds of vendors waving the American flag. It can invest in advanced processes and eventually be a rival to TSMC and keep pace with Samsung. It can architect complex compute engines with chiplets stacked in all dimensions and interconnected inside and out with gussied up PCI-Express links. But unless and until AMD, Nvidia, and the Arm collective screw up and unless TSMC screws up, Intel can never recreate the conditions that allowed it to have hegemony in the PC and in the datacenter ever again. This is like the United States after Europe and Asia were destroyed after World War II, or Rome after the fall of Carthage. These are once in a lifetime opportunities for monopoly, and they just don’t come around again. The Holy Roman Empire was a pale shadow of the glory that was Rome. But still effective, mind you, give the times many centuries after the fall of Rome.

In the quarter ended in June, which we expect to be a very good one for AMD and Nvidia, Intel did not do so good. Revenues were down just a smidgen under 22 percent to $15.32 billion, gross margins were off 50.1 percent to $5.58 billion, and even with a $455 million benefit from taxes that Intel was keeping in its back pocket for a rainy day it posted a $454 million net loss. This is real red ink, and if it didn’t have that benefit and it had to pay some taxes, it could have easily been over $1 billion in losses. The company ended the quarter with $4.39 billion in cash and $22.65 billion in short-term investments, so it has some financial maneuvering room. But as the OEM and ODM channels cut back on inventories due to the slowdown in the PC market and, we think, due to share gains by AMD and the Arm collective in CPUs, Intel’s accounts receivables are down by 35.9 percent to $6.06 billion. (The fact that we are even looking at this metric is telling.) The accounts payable is $7.95 billion, up $38.3 percent, in the June quarter. So Intel looks like it is stretching its revenue stream out a bit, which is to be expected given the massive investments it is making and its sharply curtailed business in the quarter.

In past times, the PC business sometimes masked issues in the datacenter business, and vice versa, but not this time around. Both PCs and servers have taken a dive at the same time.

The Client Computing group had $7.67 billion in sales, down 25.2 percent as PC spending has slowed dramatically now that we have all apparently done our COVID-19 desktop and notebook upgrades. And whatever sales Intel has here, it has to fight for as well as cover the expensive costs of its Intel 7 (SuperFIN 10 nanometer) process ramp, because Client Computing posted an operating profit of only $1.09 billion, down a staggering 73.1 percent.

The Datacenter and AI group, which is not precisely the same thing as the old Data Center Group we have been tracking for a decade because of the recent financial reorganization that was done in preparation for this terrible day, fell by 16.2 percent to $4.65 billion. And if Intel had left the networking adjacencies in the old Data Center Group and reported those, it would not have had as bad of a quarter as it looks. But it wanted a better story to tell for a fast-growing Network and Edge group, which had sales of $2.33 billion, up 10.83 percent.

Because of the intense pressure coming from AMD and the Arm collective and the high costs of ramping the Intel 7 and Intel 4 (5 nanometer) processes at Intel Foundry Servces, Datacenter and AI group stomached a huge hit to the middle line, with operating profits falling 89.8 percent to $214 million. That is a long, long way from the 45 percent to 50 percent operating income that Intel typically had in the prior decade with Data Center Group. Like an order of magnitude smaller as a percent of revenue. And while Network and Edge (which is called NEX for some strange reason) had a revenue boost, operating income fell by 60.2 percent to $241 million – for the same reasons. Intel is investing heavily in future chip designs and Network and Edge group has to shoulder its share of the IFS burdens as well as compete against staunch rivals who want their pieces of datacenter and edge networking and compute.

“Over the next couple of years as we rebuild our server product portfolio, we expect to grow slower than the overall data center market,” Gelsinger conceded in the conference call with Wall Street analysts going over the financial results “It’s not a fact we like but the forecast we see. We have a singular focus to regain performance and TCO leadership across all workloads and use cases from enterprise to cloud. The advantage of our incumbency position remains underappreciated and provides significant opportunity to drive outsized advantages to our customers.”

Hmmm. Intel can talk all it wants about the custom chip deals it has with Amazon Web Services and Meta Platforms (Facebook) to do custom compute engines, but do you really think these deals have any margin? We don’t. Ditto for the use of “Sapphire Rapids” Xeon SPs inside of the future Nvidia DGX-H100 systems using that company’s “Hopper” GPUs. So what? We hear Intel cut price like crazy, and if Sapphire Rapids is delayed to early next year, as we keep hearing, then you will see just how fast Nvidia can global replace that CPU. But, that said, Nvidia is in kind of a bind there. It has its own “Grace” CPUs coming early next year, and it doesn’t want to give any money to GPU rival AMD for its “Genoa” Epyc 7004s, either. Ampere Computing is a possibility, but it will be rivaling Grace, too. Intel is a no-show so far in datacenter GPUs, and eager for a design win – any win – so Nvidia no doubt got a great deal on those Xeon SPs. If it can get them, that is. Nvidia should just get Grace out the door and be done with it.

For all the talk about Intel Foundry Services and it Accelerated Computing Systems and Graphics groups, these are piddling businesses. IFS saw its revenue shrink by 53.8 percent to $122 million, with a swing from a $52 million gain a year ago to a loss of $155 million this time around. The graphics business (which is called AXG for another strange reason) brought in $186 million, up 5.1 percent, but losses expanded from $168 million in the year-ago quarter to $507 million in this June quarter. (Oooof!) And Gelsinger reiterated that AXG was on track to generate more than $1 billion in sales this year and that it would deliver more than 10,000 nodes – that would be 60,000 GPUs – to Argonne National Laboratory for the “Aurora” supercomputer before 2022 closes out. That will also be over 20,000 Sapphire Rapids CPUs, and our guess is that if Sapphire Rapids is delayed, it will be the commercial launch not these nodes. Aurora is a big chunk of that AXG revenue, but so is Alchemist, Arctic Sound M, and Blockscale GPU products alongside the “Ponte Vecchio” Xe HPC GPU accelerators in the Aurora system.

Given all of this, it is no wonder at all to us that Intel is going to shutter the Optane persistent memory business to focus on core compute and foundry. Optane is slower than expected, skinnier than expected, more expensive than expected, and harder to integrate into systems and applications than expected – and Intel held on to it too tightly for it to emerge as something that could go into all systems. This is the kind of maneuver IBM would pull in the old days, and Intel got the same result in the end. The truth is, we need something like Optane, as originally pitched, in the memory hierarchy, something that can be used like DRAM but which is not as expensive and which can be evolved at a quicker pace. To our way of thinking, system architects are going to start pooling DRAM with CXL to drive up memory usage, and this will be better and easier than integrating two different kinds of memory into systems as Intel was trying to do with DDR4 and 3D XPoint. Both approaches will save some money.

As things now stand, Intel has lowered its guidance for sales by $8 billion to $11 billion, and now expects for annual revenue to be in the region of $65 billion to $68 billion. That could prove to be optimistic, but even if Intel hits that top line, everyone will be watching that bottom line get thinner and thinner.

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