Intel: Horrible performance and guidance
Intel's 4th quarter results fell short of expectations, with the company reporting weak performance in both PCs and Data Centers. The forward guidance also reflected ongoing pressures in these areas, and there were almost no positive highlights. Additionally, Intel did not provide guidance beyond the first quarter, which is unusual as the company typically offers full-year guidance at this time. This is partly attributed to the company's expectation of a significant decline in inventory at its customers ‘end in the first quarter, but management stated that they expect a recovery in the second half of 2023.
The main focus of the earnings release was the $11 billion revenue guidance. Despite already lowered expectations, Intel failed to meet guidance for the second quarter in a row. To mitigate the impact on its bottom line, Intel has implemented a $3 billion spending reduction plan and extended the depreciation period of its equipment from 5 to 8 years. This move has raised suspicions that it may be a way to financially engineer results and this is a pretty egregious accounting lever to pull to improve gross margins.
The company has been struggling in recent quarters, with EPS missed Wall Street consensus and its own guidance. The forwards earnings visibility remained very low. Unfortunately, the bad timing also coincides with Intel’s significant investment in foundry, which requires a significant increase in capital expenditures to taking advantage of a near once in a lifetime opportunity of subsidy offered by global governments now.
The worst part is that Intel is still levering up to pay dividend even though they are incurring huge negative free cash flow. In 2022, Intel had a negative free cash flow of around $9.4 billion. They are paying out around $6 billion per year in dividends. They had roughly $11 billion in cash left at the end of the year, which they expect to quickly spend this coming year. This is a significant deviation from their original plan, which was to spend around $1.5 billion this year, and reach breakeven on free cash flow for 2023 and 2024. However, with the high dividend payments, they will now burn through their cash balance at a faster rate.
Intel’s weakness has been greatly bolstered by micro-based challenges like AMD share gains, as well as macro-based headwinds, especially with the PC market weakening. Surprisingly, other industry’s peers such as Lam Research, KLA Corporation and Advanced Semiconductor Materials Lithography (ASML) all seemed to fare better than Intel. My hope is that AMD will fare much better on Tuesday’s earnings release.
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It's a real shame as they're doing many exciting things: moving to chiplets and aggressively advancing their process, and their general attitude has really improved. If they can execute, and that's a big if, then they could be a juggernaut.
They just have to keep from shooting their own foot in the meantime...
[Happy]