Intel fires 15,000 employees as it intensifies focus on AI

Intel is making a strategic shift toward AI as it grapples with significant financial difficulties, including an 85% year-on-year drop in second-quarter profit. The company has also announced that it’ll slash over 15,000 jobs as part of its effort to reallocate resources toward AI technology.

In light of ongoing financial struggles and escalating competition from AMD and Nvidia in the AI chip market, Intel is intensifying its investment in the development of next-generation AI chips and the expansion of its chip fabrication capabilities.

This strategic pivot comes as Intel aims to reverse its financial misfortunes and strengthen its position in the competitive AI landscape.

For the quarter ending June 29, Intel reported revenue of $12.8 billion, marking a 1% decline compared to the previous year. Its net income plummeted 85% to $83 million, reflecting the financial strain faced by the company.

In comparison, AMD recently announced impressive earnings with a 9% increase in revenue to $5.8 billion and a 19% rise in net income to $1.1 billion, driven by strong AI data center chip sales. The tech giant is leveraging its AI advancements to enhance its market position, drive growth, and improve financial stability.

Revenue from AI and data center business was down by 3% in the quarter from the corresponding quarter a year ago to clock $3 billion. In the previous sequential quarter, the business unit was seen growing at 5% year-over-year.

“Our revenues have not grown as expected – and we’ve yet to fully benefit from powerful trends, like AI,” Intel CEO Pat Gelsinger said in a note to employees. “Our costs are too high, our margins are too low. We need bolder actions to address both – particularly given our financial results and outlook for the second half of 2024, which is tougher than previously expected.”

Analysts and industry watchers, however, seem to be a bit apprehensive.

“If Intel has to run faster, it will have to shed some fat in order to do so in this AI race,” pointed out Neil Shah, VP for research and partner at Counterpoint Research. “Intensified competition in both the client and data center businesses has widened the gap between revenues and operating costs, which is proving detrimental to Intel.”

“Intel has been directionally wrong for over two decades now,” said Faisal Kawoosa, founder and chief analyst at Techarc. “It once used to be an innovator, trendsetter, and industry leader.”

For about two decades, Intel has been following others instead of trying to lead the market, he said. “It should have been taking the AI bait at least a decade back in terms of a strategic shift.”

AI to the rescue

The investments in AI PC chips along with foundry services will pay off in the long run, Gelsinger said.

“The plan will enable the next phase of our multiyear transformation strategy,” Gelsinger said answering analysts’ queries in the earnings call. “We are focused on reducing operating expenses, capital expenditures, and cost of sales while maintaining core investments to execute our strategy.”

Intel’s planned transformation includes advancements in its AI-driven product lines.

“Intel continues to define and drive the AI PC category, shipping more than 15 million AI PCs since December 2023, far more than all of our competitors combined,” Gelsinger noted in  news release.

The company said that it is “on track to ship more than 40 million AI PCs by year-end.”

“Lunar Lake, our next-generation AI CPU, achieved production release in July 2024, ahead of schedule, with shipments starting in the third quarter. Lunar Lake will power over 80 new Copilot+ PCs across more than 20 OEMs,” the news release added.

“The AI portfolio roadmap looks solid in terms of Lunar Lake for AI PC, Granite Rapids, Clearwater Forest on 18A node for Datacenters and Gaudi 3 for GPUs AI servers,” Shah added. “However,” he noted, “to catalyze this AI roadmap, Intel will have to be leaner and meaner. Investment in AI software, toolsets to optimize the models for the Intel silicon and make it easier for developers to accelerate time to market should be the key focus from the savings coming from cost-reduction measure.”

 It will take at least two to three years for Intel to turn around from the position right now, Shah pointed out.

“It’s essential for them to focus on this exploding opportunity,” Kawoosa said.  “But historically we have seen it’s very difficult to catch up for anyone in the tech world. So, I am little hopeful of anything significant coming out of it.”

In the data center market, Intel introduced its next-generation Intel Xeon 6 processor with Efficient-cores (E-cores), code-named Sierra Forest, marking the company’s first Intel 3 server product architected for high-density, scale-out workloads.

“Our Intel Gaudi 3 AI accelerator is also on track to launch in the third quarter and is expected to deliver roughly two times the performance per dollar on both inference and training versus the leading competitor,” Gelsinger said during the earnings call.

Intel’s foundry operations are also evolving to support its AI ambitions. According to the company, it is nearing the completion of its five-nodes-in-four-years strategy, with Intel 18A on track to be manufacturing-ready by the end of this year and production wafer start volumes in the first half of 2025.

“In July 2024, we released to foundry customers the 1.0 PDK for Intel 18A. Our first two Intel 18A products, Panther Lake for client and Clearwater Forest for servers, are on track to launch in 2025,” Gelsinger added.

Cost reduction strategies and efficiency goals

“Our Q2 financial performance was disappointing, even as we hit key product and process technology milestones,” Gelsinger said during Thursday’s earnings call. “Second-half trends are more challenging than we previously expected, and we are leveraging our new operating model to take decisive actions that will improve operating and capital efficiencies while accelerating our IDM 2.0 transformation.”

“These actions,” Gelsinger added, “combined with the launch of Intel 18A next year to regain process technology leadership, will strengthen our position in the market, improve our profitability, and create shareholder value.”

During the earnings call, Intel’s Chief Financial Officer, David Zinsner, elaborated on the financial headwinds and the strategic steps being taken.

“Second-quarter results were impacted by gross margin headwinds from the accelerated ramp of our AI PC product, higher-than-typical charges related to non-core businesses, and the impact from unused capacity,” Zinsner said. “By implementing our spending reductions, we are taking proactive steps to improve our profits and strengthen our balance sheet.”

Zinsner expects these actions to “meaningfully improve liquidity and reduce our debt balance while enabling us to make the right investments to drive long-term value for shareholders.”

Intel’s cost-reduction plan is comprehensive. The company announced a series of initiatives to create a sustainable financial engine that accelerates profitable growth and enables further operational efficiency and agility.

These actions include structural and operating realignment across the company, headcount reductions, and operating expense and capital expenditure reductions of more than $10 billion in 2025 compared to previous estimates.

“Lean operations will give Intel additional resources as well as timeshare to focus on AI than remain entangled in legacy products where with this kind of overhead costs they can only expect incremental growth,” Kawoosa said, adding “Intel needs a big bang to come back.”

By focusing on AI, Intel aims to not only regain its technological leadership but also to create a more resilient and profitable business model. As Intel takes these steps, the company is positioning itself to emerge stronger and more competitive in the AI era.

“Some non-core, less profitable businesses which could be a distraction, could also see divestments or spinoffs,” Shah added.