Improved business sales drive lower customer revenue

To kick off our coverage of the first earnings season of the year for the tech industry, we start as always with Intel. The blue-hued blue chip company is the first to report Q1 2022 results, with Intel reporting a mixed quarter. With revenue down on a year-over-year basis – largely due to weaker sales to customers – Intel is no longer on track to set records. At the same time, however, the company lowered its lofty expectations accordingly and, as a result, was still able to slightly exceed its Q1 guidance.

For the first quarter of 2022, Intel reported revenue of $18.4 billion, down 7% from the prior year quarter. The company’s hedge against this decline in revenue on a GAAP basis was an improvement in operating income and net income, both of which benefited from certain one-time restructuring and investment gains (sale of McAfee shares) . As a result, Intel reported net income of $8.1 billion on a GAAP basis, a 141% improvement over the year. Otherwise, working things back to non-GAAP financials, things more accurately reflect the overall revenue picture with a 35% drop in revenue.

Intel Q1 2022 Financial Results (GAAP)
Q1’2022 Q4’2021 Q1’2021 Y/Y
Revenue $18.4 billion $20.5 billion $19.7 billion -7%
Operating result $4.3 billion $5.0 billion $3.7 billion +16%
Net revenue $8.1 billion $4.6 billion $3.4 billion +141%
Gross margin 50.4% 53.6% 55.2% -4.8 points
Customer IT Group $9.3 billion $10.3 billion $10.7 billion -13%
Data Center and AI Group $6.0 billion $6.4 billion $4.9 billion +22%
Edge network and group $2.2 billion $2.1 billion $1.8 billion +23%
Accel. Computer and Graphics Group $219 million $245 million $181 million +21%
mobileye $394 million $356 million $377 million +5%
Intel Foundry Services $283 million $245 million $103M +175%

Given that this is the first quarter of 2022, this also marks the first earnings period where Restructuring of the Intel group since last summer reflected in corporate reporting. Besides the Client Computing Group and Mobileye (which Intel is still trying to spin off), Intel’s other reporting groups have all seen significant overhauls. Among other changes, GPUs/accelerators now form their own group (Accelerated Computing Systems and Graphics Group), Intel’s network and edge products form a separate group (Network and Edge Group), and Intel Foundry Services is also seeing its revenue broken down . Finally, the data center group absorbed Intel’s artificial intelligence business, making it the data center and AI group.

One of the results of this is that Intel has, at least for now, put the brakes on its attempt to portray itself as a “data-centric” company – that is, treating customer processors as a legacy business while trying to inflate its data center business. While the old Intel came close to having data center revenues surpass customer revenues, the new Intel has customer revenues firmly in the lead in terms of the most important groups. To some extent, this is an exercise in reorganizing lounge chairs – it doesn’t really impact what Intel is doing or the resulting revenue – but it’s a sign that Intel realizes they were too hasty trying to get rid of their client CPU business.

Either way, as the largest of Intel’s revised groups, the Client Computing Group (CCG) remains the company’s leader. Its size means it has a major impact on Intel’s overall financials, which is definitely the case for the first quarter. Overall, the group recorded revenue of $9.3 billion, down 13% from the year-ago quarter, when Intel recorded $10.7 billion. Meanwhile, the group’s operating profit fell 34% to $2.8 billion.

According to Intel, CGC’s revenue decline was primarily due to the continued loss of processor and modem orders from Apple, as well as reduced demand for entry-level consumer devices and depletion of stocks by equipment manufacturers. Digging deeper into Intel’s statements, we see that the drop is almost entirely on the laptop side; while desktop PC revenue fell only $129 million from the year-ago quarter, notebook PC revenue fell $997 million. Unfortunately, Intel doesn’t provide any information on relative changes in ASPs or sales volumes, so it’s hard to tell to what extent this is due to selling fewer chips, versus selling chips at lower prices. .

Otherwise, all of Intel’s remaining groups saw revenue gains from Q1’21. The Datacenter and AI Group (DCAI) reported revenue of $6 billion for the quarter, up 22% from a year ago. That said, operating income was slightly below flat as Intel’s higher revenues came at the cost of the 10nm ramp-up, as well as other product investments. According to Intel, most of the revenue growth in this segment came from increased demand for Xeon products from the company’s hyperscale and enterprise customers.

The last of Intel’s large ($1B+) groups after the restructuring is the Network and Edge (NEX) group, which inherited Intel’s networking, IoT, and connectivity groups. NEX reported revenue of $2.2 billion for the quarter, an increase of 23% over the prior year quarter. According to Intel, revenue growth here has been driven by demand for cloud networking products, as well as an increase in edge hardware deployments.

Intel’s portfolio includes the Accelerated Computing Systems and Graphics (AXG) group, Mobileye and Intel Foundry Services. AXG, which hosts all of Intel’s accelerator and GPU offerings, is essentially waiting for Intel’s Alchemist Architecture GPUs and accelerators like Ponte Vecchio to start shipping in large volumes and generating significant revenue ( > $1 billion). But until then, it’s something of a money sink for Intel’s balance sheets, as the $219 million in reported revenue is only a fraction of ramp-up and development costs. of the group, resulting in an accelerated operating loss of $390 million.

Meanwhile, Mobileye, which is still in the works for a possible IPO and spin-off from Intel, set a new record for the quarter with $394 million in revenue, up 5% from the period of the previous year. Operating profit suffered slightly, however, as the group prepares for its next-generation products.

Finally, when it debuted on Intel’s balance sheet, Intel Foundry Services posted revenue of $283 million for the quarter. This is a 175% increase in revenue from Q1’21, where Intel only manufactured $103 million worth of goods for other customers. Like AXG, Intel classifies this as an “emerging” segment, expecting revenue to grow significantly in coming years and reporting that customers have 30 test chips committed to the Intel 16 process. Still, IFS is not yet a lucrative business, as it recorded a loss of $31 million for the quarter, which Intel attributes to the additional investments they made in the custom foundry business.

Looking ahead, Intel expects another slightly lower quarter for Q2 2022. At this point, the company is forecasting revenue of $18 billion, which would be down 3% from in Q2’21, and a GAAP gross margin of 48%. Meanwhile, Intel’s revenue projections for the year remain on track at $76 billion. Notably, neither the quarterly nor full-year outlook has a gross margin above 49%, which, if sustained, will be a significant change of pace for Intel. Long a 60+ percent company, even in recent years Intel has generally maintained a gross margin of 55 percent and above under GAAP. However, as Intel continues to face fierce product and fab competition, not to mention ever-increasing fab R&D costs, Intel CEO Pat Gelsinger has made it clear that it was willing to sacrifice some of Intel’s vaunted margins in order to make the necessary investments. for the long term.

Intel’s Q2’22 revenue will be driven by multiple product lines. While the all-important CCG won’t have much (if anything) new to say beyond the early Raptor Lake sampling, the second quarter should see a further increase in the number of Sapphire Rapids Xeon chips being shipped to closest Intel server customers, with a full launch still slated for this quarter as well, if Intel’s most recent roadmap holds true. Meanwhile, Q2 will be Q1 with Intel’s Alchemist GPUs shipping in higher volumes. In total, the company expects to ship more than 4 million first-generation Xe-HPG GPUs this year.

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