Intel datacenter GPU business shows signs of bottoming as market structure shifts fundamentally.

Intel's first quarter of 2023 proved brutally difficult for the chip designer and manufacturer. The company's sales across all product lines fell 36.2 percent to $11.721 billion, and it swung from an $8.11 billion net gain in the year ago quarter to a $2.76 billion loss. Though the company retained $27.53 billion in cash and investments following intense cost cutting, that cash pile had declined 38.4 percent from a year prior. The year ago quarter included a $4.32 billion gain on investments that provided a more challenging year-over-year comparison than usual.

The collapse was particularly acute in the Data Center & AI group, the division housing server infrastructure and predominantly driven by Xeon SP CPU sales. In the quarter ended in March, Data Center & AI revenues declined 38.4 percent to $3.72 billion, with Xeon XP server shipments down 50 percent—a far steeper drop than the 16 percent decline in overall server CPU shipments for all of 2022. More troublingly, the division posted its first operating loss, a loss of $518 million compared to a gain of $1.69 billion in the year ago quarter. On a trailing twelve month basis, DC&AI had $16.88 billion in sales, down 29.1 percent, with operating profits collapsing by a factor of 100X to a mere $84 million.

The Programmable Solutions Group, the former Altera FPGA business, provided the sole bright spot, achieving record revenues for the second quarter in a row with a 36 percent year-on-year increase, driven by higher average selling prices and improved device supply eating into order backlogs. In contrast, the Network and Edge group reported sales of $1.49 billion, down 32.7 percent, with an operating loss of $300 million compared to a gain of $366 million in the year ago period. On a trailing twelve month basis, NEX sales were down 2.9 percent to $8.15 billion and operating profits had declined by a factor of 25X to $74 million.

Pat Gelsinger, who had trained by the side of Intel's founders, led the recovery effort. The collapse reflected Intel's failure to keep pace with Taiwan Semiconductor Manufacturing Co in process nodes and foundry investments, a situation reminiscent of the hubris of International Business Machines in the late 1980s and early 1990s. Gelsinger told Wall Street analysts: "As the industry continues to navigate through multiple global challenges and headwinds, we remain cautious on the macro outlook, even as we expect some modest recovery in the second half. We are seeing increasing stability in the PC market, with inventory corrections largely proceeding as we had expected. However, the server and networking markets have yet to reach their bottoms as cloud and enterprise remain weak. As a result, our Q2 revenue guide embeds continued inventory corrections in our core markets and a range of normal seasonal to better-than-seasonal growth off depressed Q1 revenue levels. We remain focused on what is within our control and steadfast in our commitment to advancing our strategy."

While history suggested Intel could revive itself—having transitioned from memory maker to CPU maker in the 1980s and recovered from AMD's first attack on its server base in the 2000s—considerable pain lay ahead. The company needed to restore its reputation as both a semiconductor manufacturer and chip designer, a challenge compounded by the PC market collapse occurring simultaneously with intense datacenter competition and foundry struggles. Gelsinger said that the "Q1 consumption TAM" for servers declined both sequentially and year over year at an accelerated rate, with further TAM declines expected in the first half of 2023 and recovery in the second half. The future competitive landscape would eventually pit two strong X86 players against the emerging Arm collective and RISC-V collective—assuming Intel could mount that recovery at all.