The news about Intel Foundry takes center stage this week. Prior to summarizing the Intel announcement, here’s a short comment. Before Pat Gelsinger took office as the company’s CEO, some investors suggested Intel to adopt the fabless model, just like AMD in 2008. Gelsinger, instead, doubled down on manufacturing, announcing not just his intention to keep the fabs, but even to offer a foundry service. Intel’s decision to separate the financial reporting for the two parts of its business – foundry service VS chip sales – is probably an unavoidable step in the implementation of Gelsinger’s strategy, and will put it to the test. On the one hand, the new reporting structure will force Intel Products (the chip sales business) to correct its inefficiencies, as it will lose the convenience of easy access to internal manufacturing resources and seemingly costless design respins. On the other hand, Intel Foundry will be forced to quickly become competitive against TSMC, also because – at least officially – Intel Products will now be free to choose any other foundry instead. As of today, an unavoidable side effect of this decoupling is the public disclosure of Intel Foundry’s substantial losses. Will Intel Foundry deliver on its promise of reaching breakeven around 2027? It would be interesting to know if Intel has a plan B, and – if so – if plan B involves going fabless as an extreme option. The new financial reporting structure makes it easy to spot the lossy business within Intel (if any), and this easy spotting capability may sound like setting the stage for divestiture. A key difference from 2008, however, is the current chip war economy, with taxpayers around the world currently subsidizing their respective domestic semiconductor industries. Depending on the dose, public subsidies can offset a company’s inefficiencies and make it competitive on the market. Let’s now move to the Intel announcement and other related news.
Intel’s financial reporting structure to separate Foundry from Products
On April 2, Intel outlined a new financial reporting structure that is aligned with the company’s previously announced foundry operating model. The new reporting structure establishes a foundry relationship between Intel Foundry, the company’s manufacturing organization, and Intel Products, comprised of the company’s product business units. Beginning with the first quarter 2024, Intel will present segment results aligned to the following operating segments: Client Computing Group (CCG); Data Center and AI (DCAI); Network and Edge (NEX); Intel Foundry; Altera; Mobileye; and Other. CCG, DCAI and NEX will collectively be referred to as Intel Products; Altera, Mobileye and Other will collectively be referred to as All Other. Under this new structure, Intel Foundry will recognize revenues generated from both external foundry customers and Intel Products, as well as technology development and product manufacturing costs historically allocated to Intel Products. Instead of recognizing manufacturing costs that were previously allocated to the product operating segments, Intel Products will be charged a market-based price by Intel Foundry. Following the adoption of this new reporting structure, Intel filed a new Form 8-K containing recalculated operating segment results for the years 2023, 2022 and 2021.
