Intel's Crisis and Self Help: Or Sell Altera Equity to Grab into the AI Main Battlefield

Recently, Intel released its third quarter financial report, with Intel's revenue of $13.284 billion, a year-on-year decrease of 6.2%, higher than market expectations of $13.03 billion. But the net profit is not optimistic, with a net loss of 16.639 billion US dollars. Along with the huge losses, the news that Intel is about to sell a portion of its equity in Altera has attracted attention. In the third quarter, Altera's FPGA business fell 44% year-on-year, which is also seen as Intel's self rescue from losing its "burden". The AI market faces fierce competitors from AMD and Nvidia, with Altera falling 44% in revenue below expectations
Let's first take a look at the performance of each business. Total product business revenue, including client business, data center and AI business, network and edge computing business, totaled $12.19 billion, down 2% year on year.
The client business revenue was $7.33 billion, a year-on-year decrease of 6.8%, lower than the market expectation of $7.46 billion, accounting for approximately 41.6% of the total revenue. Specifically, the Desktop business declined by 24.8%, while the Notebook business grew by 8.5%.
Intel's profits mainly come from its PC client business, accounting for 55.2% of the total revenue for the quarter. The decline in this business has affected the performance of the entire quarter. Its main competitor AMD's market share in the client business continues to increase, with a year-on-year growth of 29.5%. For Intel, the most important client business market share is being eroded, which is a huge challenge.
The revenue of data center and AI business was around 3.35 billion US dollars, a year-on-year increase of 9%, accounting for about 8.6% of the total revenue, thanks to the increase in demand for traditional servers. The main market demand for this business is GPU and AI CPU. Intel launched the Xeon 6 processor, codenamed Sierra Forest, this year and introduced a server solution based on the Xeon 6 energy-efficient core.
Even though Intel is constantly increasing the speed of new product releases to capture more market share, it cannot ignore the significant advantages that competitors such as Nvidia have in this field. According to data from semiconductor research firm TechInsights, the total global shipment of data center GPUs in 2023 is about 3.85 million, of which Nvidia's data center GPU shipment reached 3.76 million, capturing 98% of the global market share. Intel still needs to continue to launch highly advantageous products to capture this market. Therefore, we can also see that Intel finally officially released the new generation AI accelerator Gaudi 3 in September to compete with the NVIDIA H100 GPU accelerator.
The network and edge computing business (NEX) revenue was $1.511 billion, up 4% year on year, accounting for 8.6% of the total revenue. Thanks to inventory adjustment and improvement, the business also gradually recovered.
The revenue of wafer foundry business was 4.4 billion US dollars, a year-on-year decrease of 8%, accounting for about 25.1% of the total revenue. The Intel 4 and Intel 3 wafer combinations have a certain driving force for growth in this quarter.
Intel included Altera, Mobileye, and other businesses in all other businesses, totaling $1.039 billion, a year-on-year decrease of 28%, accounting for approximately 5.9% of total revenue. Among them, Altera's business suffered the most severe losses.
Altera's FPGA business generated revenue of $412 million, a year-on-year decrease of 44%, but achieved a 14% month on month growth. The revenue of Intel's autonomous driving division Mobileye business was $485 million, a year-on-year decrease of 54%. Mobileye has also faced challenges in the Chinese market, with a 50% decrease in shipments in the quarter.
Altera: Intel's FPGA Business Has More Thunder than Rain
In 2015, Intel announced the acquisition of FPGA manufacturer Altera for $16.7 billion, with a clear goal of data centers. But after completing the acquisition, Altera's revenue remained at around $2 billion and showed a downward trend, with a single digit share in Intel's total revenue. At that time, Xilinx's revenue, which had not yet been acquired by AMD, had been growing year by year. Obviously, Altera did not show the potential that Intel had hoped for.
Starting from the first quarter of 2024, Altera's business will be separated from its data center and AI businesses, with separate computing. Perhaps it will be in the first quarter that Intel will re-examine Altera.
According to the financial report data, Altera's revenue plummeted from $735 million in the third quarter of 2023 to $480 million in the fourth quarter of 2023, and profits also plummeted. Despite maintaining revenue growth in the first quarter of 2024 and finally achieving a turnaround from losses to profits in the third quarter, Intel is facing significant pressure and attempting to turn the situation around, as evidenced by its decision to sell a minority stake.
From Intel's overall performance, the ability to generate revenue from various businesses is insufficient, and even the client business has been continuously eroded in market share due to a decline in competitive advantage. Previously, there were rumors that Qualcomm would acquire Intel, but the possibility of selling a small stake in Altera's business is higher.
Industry sources indicate that acquisition companies Silver Lake, Bain Capital, and private equity firm Francisco Partners are potential bidders, and the value of the transaction will be in the billions of dollars or more. If the above news is true, Intel may be able to alleviate some of its urgent needs, after all, Intel's OEM business is still losing money. Intel CEO Pat Kissinger also mentioned during the earnings conference call that it is expected to complete the sale of a portion of Altera's shares in early 2025.
Of course, selling a portion of the shares does not mean that Intel has completely abandoned its FPGA business. At present, Intel has launched multiple FPGA products, including Agilex7 FPGA, Agilex5 FPGA, and Agilex3, all of which have achieved mass production and shipment. Agilex9 RF was put into mass production in March this year. The above products are a combination of high school and cost optimized chips and boards, and Intel's ultimate goal in FPGA is the high-performance market. We believe that driven by emerging demands such as data centers and AI, FPGA still has enormous potential, which has become the key to Intel's turnaround.
A 'self rescue' operation
In the third quarter, Intel made significant progress in its $10 billion cost cutting plan. Including the restructuring and operational reorganization of the entire company, as well as layoffs, operating expenses, and capital expenditures, Intel has already reduced its office staff in the United States and Israel. In August, it announced the layoff of 15000 employees, accounting for 15% of the total number of employees. It also abandoned the acquisition of Granulate in 2022 and divested its non core business outsourcing department, making it an independent subsidiary. Through a series of actions, Intel will embark on a 'self-help' campaign in 2024.
Compared to the second quarter, Intel also reduced its research and development expenses, with a total of $4.049 billion in the third quarter, which is closely related to layoffs. Intel stated that this is a difficult but necessary change and expects to achieve a reduction of over 15% in employees by the end of the year. Currently, cost reduction and efficiency improvement will remain one of Intel's main strategies.
Intel CEO Pat Kissinger stated in the financial report that "our revenue has exceeded the midpoint of the guidance range, and we are taking urgent action to create positioning businesses for sustainable value creation in the future." After abandoning the acquisition of Granulate and adjusting the company structure, it is expected that Intel's business will be more focused and clear in the future.
In terms of business, AI can be said to be Intel's fundamental business, as both client business and data center and AI business are trending towards AI, and these two major businesses together account for over 60% of total revenue. Therefore, squeezing into the main battlefield of AI and firmly grasping the core business is the key.
In the client business, Intel is betting on the AI PC track. Intel plans to deliver over 100 million artificial intelligence PCs by the end of 2025. In September of this year, Intel launched its Core Ultra 200V series processors, codenamed Lunar Lake, which have the advantage of lower power consumption and have achieved improvements in performance graphics and artificial intelligence. This month, Intel launched the Intel Core Ultra 200s series desktop processors codenamed ArrowLake, extending the capabilities of AI PCs to desktop platforms.
At present, Intel still faces strong competitors such as AMD and Qualcomm in the AI field. AI performance and battery life are the core parameters of AI PCs. The Intel Core Ultra 200V series competes with products such as Qualcomm Snapdragon X Elite, and it is worth looking forward to how much market share they can gain in the future.
In terms of OEM business, the most important focus is on the 18A process technology, which Intel has stated will be launched in 2025. 18A will take on the main role of OEM business and may be able to acquire more external customers for Intel after scheduled mass production. After separating the OEM business, it will have better flexibility. Previously, Intel developed a "four year five node" technology roadmap, planning to cross five nodes within four years. Intel believes that the fifth node - Intel 18A - will complete design and process innovation, bringing Intel back to its leading position in process technology. Two leading products based on the 18A process node - PantherLake for AI PC client processors and ClearwaterForest for server processors - will be launched next year.
But we also noticed that Intel's OEM factories are still in a loss making state. When can this money burning business turn losses into profits? I believe Intel also has high hopes for the 18A.