Real-Time Commentary: Intel Q2 PC & Server CPU Revenue Up; External Foundry Priority Down

Chip giant $Intel(INTC)$   reported its Q2 earnings after the bell, with its stock seeing volatile after-hours trading in a 12% range before settling down over 4%. New CEO Lip-Bu Tan is overhauling several prior strategies, making a major pivot in the controversial Intel Foundry business in a bid to restructure the company. However, it remains to be seen whether this behemoth can turn the ship around.

Q2 Key Financial Highlights

~Revenue: $12.9 billion, slightly up 0.2% YoY but down 9.8% QoQ. This result beat the company's guidance range of $11.2-$12.4 billion.

~Gross Margin: GAAP gross margin hit a new low at 27.5%, down 7.9 pts YoY and 9.4 pts QoQ. Non-GAAP gross margin was 29.7%, down 9.0 pts YoY and 9.5 pts QoQ, significantly missing the 36.5% guidance. The miss was primarily impacted by incremental costs from spending reduction plans, including ~$800 million in non-cash impairments and accelerated depreciation, and ~$200 million in one-time period costs. Excluding these impacts, the non-GAAP gross margin would have been 37.5%, beating guidance.

~Operating Income: A GAAP operating loss of $3.18 billion was reported, impacted by $1.9 billion in one-time restructuring charges. The Non-GAAP operating loss was $0.5 billion, swinging from a profit both YoY and QoQ.

~Net Income: Intel posted a GAAP net loss of $3.02 billion, marking the sixth consecutive quarter of losses. The Non-GAAP net loss was $0.44 billion, swinging from a profit YoY and QoQ, and missing the breakeven guidance.

~Cash Flow: Cash from operations was $2.1 billion. With gross CapEx at $4.5 billion and net CapEx at $3.1 billion, the adjusted free cash flow was negative $1.1 billion, the fourth consecutive negative quarter.

Q2 Revenue Breakdown by Platform

~Client Computing Group (CCG): The PC-centric group remains Intel's largest business, with revenue of $7.87 billion (-3% YoY, +3% QoQ), accounting for 61% of total revenue. However, its operating profit fell 22% YoY to $2.05 billion, with operating margin at 26.1%—a new low since Q2 2023.

~Intel Foundry (IF): The internal/external foundry and advanced packaging business is Intel's second-largest segment. Revenue was $4.42 billion (+3% YoY, -5% QoQ), making up 34% of the total. Its operating loss widened both YoY and QoQ to $3.17 billion, for a staggering operating loss margin of -71.7%.

~Datacenter and AI (DCAI): Primarily server CPUs, this is the third-largest business with revenue of $3.94 billion (+4% YoY, -5% QoQ), representing 31% of total revenue. Operating profit grew an impressive 162% YoY to $0.63 billion, with operating margin improving for the fourth straight quarter to 16.1%.

~Other Businesses: Automotive chip unit $Mobileye Global (MBLY.US)$ saw revenue of $0.51 billion (+15% YoY), raising its full-year guidance. The soon-to-be-divested FPGA unit Altera posted revenue of $0.45 billion (+24% YoY), signaling a recovery in FPGA demand.

Intel's Bedrock: Still the CPU Business, Reliant on PC/Servers with 18A as the Lifeline

Intel's business remains propped up by its traditional PC business, which contributes 50-60% of revenue. However, due to $Advanced Micro Devices (AMD.US)$ 's sustained competitive lead in both desktop and notebook, a clear seesaw effect has emerged: as AMD's PC revenue grows, its profit margins are closing the gap with Intel's.

~In Q2, Intel's notebook and desktop revenue totaled $6.6 billion, down 6% YoY, with unit shipments down and ASPs flat.

~Looking to Q3, management expects a significant ramp of

~Lunar Lake for notebooks, which will pressure gross margins. Meanwhile, stronger-than-expected demand for

~Raptor Lake desktops is causing Intel 7 capacity constraints for the second half of the year.

Intel is arguably a major loser in the current AI wave. Its "Datacenter and AI" business name is somewhat of a misnomer, as revenue is overwhelmingly from server CPUs, not AI accelerators. Even in its server CPU stronghold, Intel continues to lose market share to AMD, which has grown its x86 server share from under 5% to over 40% in recent years.

~Intel's Q2 server CPU revenue grew YoY, driven by strong hyperscaler demand and its selection as the host CPU for NVIDIA's DGX B300. Unit shipments rose 13% YoY, but

~ASPs fell 8% YoY due to a price war with AMD. Management admitted it has a significant performance gap with AMD at the high end and is still playing catch-up.

Intel's lifeline, the Intel 18A process for its Panther Lake products, is being prepped for production in Arizona, with steady progress reported on yield and performance targets. Panther Lake is expected to ramp to volume production by year-end.

~Management stated that Intel 18A and 18AP will be the key nodes for the next three product generations. Crucially, they believe they can achieve a reasonable ROI on 18A with internal volume alone, not ruling out the possibility of having no external customers.

~In another major shift, Intel 14A (slated for 2028/2029) will be developed as a foundry-first node, but the company will only invest in capacity once orders are secured.

The market views these two points as a major and pragmatic shift in the strategic priority of Intel's foundry ambitions.

Deepening Cost Reductions: More Layoffs and Halted Fab Construction

Intel's headcount far exceeds competitors like $Taiwan Semiconductor (TSM.US)$ (~70k), $NVIDIA (NVDA.US)$ (~36k), and $Advanced Micro Devices (AMD.US)$ (~28k). As of Q2, Intel's employee count was 96,400. The company is targeting a reduction to 75,000 by year-end and has already cut management layers by approximately 50%. This implies room for another ~22% reduction in headcount in the second half of the year.

Management stated that past capacity investments were well ahead of demand and were unwise and excessive. Going forward, capacity will be added based solely on customer volume commitments. Intel will not proceed with its manufacturing projects in Germany and Poland. It will consolidate its Costa Rica assembly and test operations into existing sites in Vietnam and Malaysia. The pace of construction in Ohio will be further slowed.

Management noted that about 50% of the current $18 billion CapEx is sustaining or maintenance spending. They expect 2026 gross CapEx to be meaningfully higher than $9 billion but certainly... less than $18 billion. This outlook will impact semiconductor equipment makers like $ASML Holding (ASML.US)$ .

Cautious Q3 Outlook and Valuation Context

Management is cautious about the second half of the year, citing the pull-in of orders during the first half due to tariff uncertainty.

~Q3 Guidance: Revenue is forecasted in the range of $12.6-$13.6 billion, representing a sequential change of -2% to +6%. This is below the historical high-single-digit sequential growth for Q3 and will be driven primarily by the traditional PC business.

~Q3 Segment Outlook: The Client Computing Group (CCG) is expected to see sequential revenue growth, while Intel Foundry revenue is expected to decline sequentially.

~As of Q2, Intel's book value (net assets) stood at $97.9 billion. The company's valuation has historically hovered around a 1x Price-to-Book (P/B) multiple.

Conclusion: A Turnaround Takes Time

The effectiveness of the new CEO's sweeping changes will take time to validate and may not provide a short-term boost to results. In the long term, the success of the Intel 18A process remains the make-or-break factor for Intel's potential turnaround and is the key catalyst to watch closely.

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