1 way to boost foundry profits after Intel suffers $7 billion loss

From the first quarter of 2024, intel (INTC -8.22%) The foundry business will be reported as a separate business unit. This is part of the company’s plan to grow into a major player in the foundry market by 2030. Intel’s product division will treat the foundry like an external supplier, and the foundry will treat Intel’s product division like a customer.

In preparation for this transition, Intel reorganized its financial statements from the past several years to align with the new reporting structure. The foundry business is currently very unprofitable. This is not surprising. Almost all of Intel’s foundry revenue is generated internally, and the company has been investing heavily in new manufacturing technology and facilities, while demand for the company’s chips has plummeted due to the PC market collapse following the pandemic.

The stock market reacted poorly to the disclosure, sending Intel shares lower on Wednesday. Intel’s foundry division reported an operating loss of nearly $7 billion in 2023. The company’s assurances that its foundry division will break even around 2027 and achieve an adjusted operating margin of 30% by 2030 did little to brighten investors’ moods.

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One thing to note is that the foundry division has only recently begun operating as its own business unit. The $7 billion loss in 2023 is partly a result of Intel’s manufacturing costs being historically spread across product segments.

Intel’s restructured financial statements, while helpful to investors, may not be very meaningful as a guide to future results. In the past, there was little incentive to efficiently utilize Intel’s manufacturing side in its products. Beyond the lower cost efficiencies that can now be realized because the foundry is its own business unit, the transition to serving external as well as internal customers will lengthen the useful life of Intel’s manufacturing assets.

Back in the days when Intel only made its own chips, the use of a particular process node declined quickly as a new process node came online. As capital requirements for cutting-edge semiconductor foundries explode, this business model no longer works.

The foundry model allows Intel to extend the lifespan of its process nodes. The Intel 3 processor that the company will use in its future server CPUs will also be available to foundry customers. The company is planning multiple revisions to Intel 3, adding new features and improved performance. Even if the node is no longer suitable for cutting-edge products, it may still attract the attention of customers looking for mature, cost-effective manufacturing.

Intel will play a similar game with the Intel 18A process and the next-generation Intel 14A process, which will be ready in early 2025. The revisions to both process nodes will extend their useful lives far beyond what would be possible if the company planned to manufacture its own chips.

About 1/3 of the market leaders TSMCof revenue comes from process nodes greater than 10 nanometers (nm), with 24% of revenue still coming from process nodes greater than 28 nm. (For perspective, TSMC launched its 28nm node in 2011.) Although these older nodes have improved over time, these investments made long ago continue to pay off. Intel is trying to replicate this model.

Intel’s goal isn’t that far away

Some investors may not believe that Intel can take its foundry business from a $7 billion annual loss to a 30% operating margin by 2030, but this shift in how the company utilizes its manufacturing assets could be a powerful profit driver. This will be Intel 3, Intel 18A, Intel 14A and other future nodes will be profitable for a very long time. The company will spend about $100 billion in the U.S. alone to build and expand its manufacturing facilities. This is not feasible unless the new process node has a long lifetime.

If Intel’s foundry business starts generating meaningful revenue from external customers, its revenue picture could improve quickly. The company’s goals may seem ambitious, and it certainly has a lot to prove, but Intel’s goals are realistic.