Intel's (INTC -6.10%) data center and artificial-intelligence (AI) segment, which includes server CPUs, data center GPUs, and AI chips, suffered a 15% year over year decline in revenue during the second quarter. The good news is that this decline is an improvement over the first quarter, when the segment booked a 39% decline. The bad news is that a comeback is going to take time.
Multiple headwinds
Unlike in the PC CPU market, where Intel has largely regained the performance crown from rival Advanced Micro Devices, the company is in much worse shape in the data center CPU market. Sapphire Rapids, an innovative line of data center CPUs from Intel that feature specialized accelerators for various workloads, was chronically delayed. Sapphire Rapids finally launched early this year, and the company is on the cusp of selling its 1 millionth chip. But those delays opened the door for AMD to make huge gains.
AMD's Genoa family of data center CPUs launched a few months before Sapphire Rapids, gaining AMD a massive advantage in terms of core density. Tom's Hardware called these chips a "server slam dunk." For any workload that benefits from massive parallelizability, AMD's Genoa is the clear choice, even with Sapphire Rapids now available.
On top of competitive pressure, it's taking longer than expected for Intel's customers to work through data center CPU inventories. The company expects the inventory correction to continue into the second half of the year, reducing demand for its data center CPUs. The surge in interest in artificial intelligence is both helping and hurting Intel. While Intel sells data center GPUs and other AI accelerators, demand for its CPUs is being negatively impacted by customers' prioritizing AI accelerators over general compute capacity.
Because of these issues, Intel expects data center CPU sales to decline in the third quarter compared to the second quarter. The company sees a rebound in the fourth quarter, and in the long run, it expects demand for data center CPUs to rise.
Regaining leadership
Intel is dead set on regaining its edge over AMD, but it will take a while. Emerald Rapids, the successor to Sapphire Rapids, is scheduled for the fourth quarter of this year using the same Intel 7 manufacturing process used by Sapphire Rapids. The maximum number of cores supported won't increase by much, so Emerald Rapids probably won't be a game-changer for Intel.
Things get more interesting in 2024. Granite Rapids, the successor to Emerald Rapids, is set to launch using the upcoming Intel 3 manufacturing process, which should bring significant efficiency gains. Intel is also set to launch Sierra Forest, a new line of data center CPUs aimed at cloud workloads. Sierra Forest will use Intel's lower-power efficiency cores, with as many as 144 packed into a single chip. Sierra Forest will be followed by Clearwater Forest in 2025, which will use the sub-2nm Intel 18A manufacturing process.
Intel's data center segment was unprofitable in the second quarter because of lower demand, lower factory utilization, and a worse product mix. The situation may not improve until 2024, and that assumes Intel's next-gen products launch on time and deliver the expected performance and efficiency. The company has a strong roadmap, but a quick comeback is not in the cards.
