Intel (INTC) Adds To Gloomy Semiconductor Headlines With Layoff Plans As It Aims For Profit Rebound
1:51 pm Wednesday, October 12th, 2022
When Intel (INTC) issued its dismal Q2 earnings report in late July, CEO Pat Gelsinger commented during the conference call that the company plans to adjust its spending levels in the near-term. CFO David Zinsner added that restructuring charges were likely for Q3 as INTC looks to improve its operating efficiency. It turns out that those statements were a forerunner for a huge round of upcoming layoffs that could impact many employees. According to Bloomberg, INTC is planning a workforce reduction that will cut thousands of positions, including a possible 20% downsizing of its sales and marketing team.
The collapse of the PC/laptop market is primarily to blame for the layoffs. In Q2, INTC’s Client Computing Group (CCG), which produces PC processors, experienced a 25% decline in revenue. Since then, demand has only weakened, as evidenced by severe guidance cuts from Advanced Micro (AMD) and Micron (MU) on October 6 and September 29, respectively. Following a boom in 2020 and 2021 that was ignited by the work-from-home transition, a bust for the PC market has emerged in 2022. With inflation and rising interest rates taking a toll on consumers’ budgets, spending on consumer electronics has drastically fallen, leaving chip makers with a glut of inventory.
Implementing a large workforce reduction plan isn’t going to solve all of INTC’s problems, but it’s evident that there’s plenty of room for improvement on the bottom line.
In Q2, non-GAAP EPS dove by 79% yr/yr due to lower revenue, increased unit costs, investments in production, and higher inventory reserves. For FY22, EPS is projected to decrease by nearly 60%.
Despite the demand headwinds, R&D and MG&A expense was still up by 18% to $5.5 bln last quarter. The increase makes this expense category an easy target for spending reductions.
As INTC cuts its spending levels, Gelsinger expects the actions to begin paying off in Q3 and Q4, with gross margin returning to its target range by Q4. Last October, he said that gross margin would dip to 51-53% over the next couple of years before improving.
The gloomy news for the semiconductor space continues today with INTC planning a large round of job cuts. This will result in a significant charge in its Q3 results, which are expected on October 27. While the layoffs will help shore up INTC’s bottom-line, the initial reaction to the news has been muted. We believe this may be attributable to the idea that earnings expectations for INTC — and for other chip makers — still have room to fall as new concerns for the industry seem to crop up on a daily basis.
