Intel's weak position in AI chip market leads to mass layoff

Intel has suffered a significant setback in its vision of becoming a leading AI chip supplier.

On Thursday, Intel said it will cut $10 billion in capital expenditures in 2025. To achieve that number, the company plans to cut by the end of the year 15,000 jobs or 15% of its workforce of roughly 110,000.

"This is painful news for me to share," Gelsinger said in a letter to employees. "I know it will be even more difficult for you to read. This is an incredibly hard day for Intel as we are making some of the most consequential changes in our company’s history."

Intel's annual revenue in 2020 was $24 billion higher than in 2023, yet the company's workforce is 10% larger today, Gelsinger said in his letter. To reduce its headcount, Intel plans to roll out a retirement offering for eligible employees and offer an application for voluntary departures beginning next week. 

Driving the reduction in Capex is the need to align expenses with sales that have failed to meet Wall Street expectations. The company reported second quarter revenue of $12.8 billion, down 1% year over year. Intel forecasted revenue of $12.5 billion to $13.5 billion for the third quarter 2024, substantially less than Wall Street analyst expectations of $14.3 billion. Intel also expected a loss of 3 cents per share versus analyst expectations of a profit.

Those numbers introduced a new reality to Intel CEO Pat Gelsinger.

"We're clearly tempering our view on how fast we can grow in the near term based on market conditions," Gelsinger said during an earnings call with investors.

Intel, once the global leader in chipmaking, has fallen far behind competitors. Nvidia, the leading supplier of AI accelerators, doubled Intel's revenues in its last fiscal quarter, a 262% increase year over year. AMD, which competes with Intel across many of its chip products, reported 5.8 billion in revenue for the second quarter of 2024, up 9% year over year. It has a market capitalization of nearly $100 billion more than Intel.

The drag on Intel's turnaround is its failure to feed the hot AI market that has driven growth at Nvidia and AMD. Intel's Gaudi processor hasn't been well-received by cloud providers, the largest buyers of AI accelerators.

"AI investment is sucking up a lot of buying decisions as the market readjusts to the new world of AI models and training," said Jack Gold, principal analyst for J.Gold Associates. "Intel does not have a significant capability in that space."

Intel's performance in its traditional market of PC CPUs was positive last quarter. Revenues from PC makers grew 9%. However, the company reported a 3% drop in sales of chips for data center servers.

Intel's growth in the PC market has been driven by the introduction of AI PCs, which are primarily laptops with specialized chips to run AI applications. However, that growth hasn't brought the profits Intel expected.

"An ironic silver lining of the news is that the AI PC market is doing better even than Intel expected because they’re selling more Intel Core Ultra CPUs than they thought they would," said Bob O'Donnell, principal analyst for TECHnalysis. However, the chips carry "little or no margin."

Within the AI market, Intel is unlikely to show much progress until companies start building AI applications that run at the edge of corporate networks, where Intel CPUs with built-in AI accelerators could gain a strong foothold.

"If you’re buying big on AI (today), you’re going to move toward Nvidia and AMD," Gold said. "Intel will have a trailing share in that part of the market, at least until we move towards a more edge-leading AI processing environment."

Intel's Foundry unit

Gelsinger's cost-cutting efforts mean the company will have fewer resources to drive its strategy of becoming a strong competitor to the world's leading chipmaker, Taiwan Semiconductor Manufacturing Co. Intel officially launched its Foundry unit this year to make semiconductors for all buyers, not just Intel.

The Foundry unit had $4.3 billion in revenue last quarter, up 4% from a year ago. TSMC had nearly $21 billion in revenue, a 33% increase from a year ago.

Gelsinger insisted his plans for building the Foundry unit haven't changed despite the company's financial turmoil.

"The Foundry strategy is unchanged," Gelsinger said. "However, until we have committed orders, we're going to be modest on how much equipment we put against the shells and the sites that we have in place."

Antone Gonsalves is an editor at large for TechTarget Editorial, reporting on industry trends critical to enterprise tech buyers. He has worked in tech journalism for 25 years and is based in San Francisco. Have a news tip? Please drop him an email.