Abstract:
U.S. chip giant Intel announced its third quarter financial report for 2026. Driven by the strong growth of the data center and artificial intelligence (DCAI) business, the company's current quarter revenue and adjusted earnings per share exceeded previous performance guidance. Data center business revenue increased by 78% year-on-year, setting the strongest growth record in 15 years.
However, Intel's performance outlook for the fourth quarter was lower than market expectations. The company also stated that total capital expenditures in 2026 are expected to remain at US$20 billion, and will increase significantly in 2027 to expand manufacturing capacity and meet AI server CPU demand.
Intel Chief Financial Officer David Zinsner said that 2027 will be the company's investment year and it may not be able to achieve positive free cash flow by then. Affected by factors such as weak performance guidance, an accident at an Israeli factory, and weak demand in the PC market, Intel's stock price fell 23% in after-hours trading after the release of the financial report.
PC market drags down short-term performance
The financial report shows that Intel achieved revenue of US$16.513 billion in the third quarter, a year-on-year increase of 21%; net profit attributable to Intel was US$3.3 billion, a year-on-year decrease of 18%. On a non-GAAP basis, adjusted net profit was approximately US$2.8 billion, a year-on-year increase of 169%; adjusted earnings per share was US$0.52, compared with US$0.23 in the same period last year. Intel said this was the eighth consecutive quarter that the company's revenue, gross margin and earnings per share exceeded its previous guidance.
In terms of business, data center and artificial intelligence business became the most prominent source of growth this quarter. DCAI business revenue reached US$7.318 billion, a year-on-year increase of 78% and a month-on-month increase of 17%; operating profit was approximately US$3 billion, accounting for 42% of this business revenue. The company's chief financial officer Zinsner said that the third quarter results further confirmed the important role of server CPUs in the construction of AI infrastructure.
In contrast, client computing and physical AI business (CCPG) revenue was US$8.097 billion, a year-on-year decrease of 5%. Among them, AI PC revenue increased by 35% year-on-year, but it was still not enough to offset the impact of the overall weakness in the PC market. Intel's foundry business revenue was US$6.697 billion, a year-on-year increase of 58%. However, the business still recorded an operating loss of US$1.853 billion in the quarter, and it is still far from achieving sustained profitability.
In terms of profitability, Intel's non-GAAP gross profit margin in the third quarter was 44.1%, an increase of 4.1 percentage points from the same period last year. Zinsner attributed the improvement to lower process costs for Intel 3 and Intel 18A, as well as product mix optimization. The company's operating cash flow for the quarter was $5.1 billion.
However, what really disappointed the market was the outlook for the next quarter.
Intel expects fourth-quarter revenue of $15 billion to $16 billion, non-GAAP earnings per share of $0.25, and non-GAAP gross profit margin of 38%. In contrast, LSEG's previous market expectations were for revenue of approximately US$17.07 billion and adjusted earnings per share of US$0.43. Both revenue and profit, the company's guidance was significantly lower than market expectations.
Before the financial report was released, Intel's stock price closed at $92.07 during the regular trading session on October 29, down 3.62%. After the financial report was released, the stock price fell by about 23% in after-hours trading.
In addition, Intel also faces financial pressures caused by limited production supply, a weakening PC market, and continued investment in manufacturing operations. In particular, although the company has seen rapid growth in AI server CPU demand, it is still difficult to fully meet customer demand in the short term. At the same time, rising memory prices have weighed on the client PC business.
Capacity and memory shortages constitute a double constraint
In the subsequent earnings call, Intel CEO Lip-Bu Tan linked the growth of the data center business to the demand for AI infrastructure. He said that market demand in the third quarter was more balanced than in previous quarters, and the strong momentum of the data center and AI business drove performance beyond expectations. Especially with the development of AI agent applications, CPUs are gaining new market demand.
“Even if we adopt conservative estimates of the total number of digital agents and the number of agents served by a single CPU, it is easy to foresee the huge potential market size of CPUs in terms of sales and shipments in the next five years.” Chen Liwu said.
Zinsner further gave his industry judgment during the conference call. He said that driven by AI demand, the server CPU industry's supply shortage may continue until 2027 and continue into 2028.
Intel is trying to meet this demand through a new generation of products. Chen Liwu said that Granite Rapids based on the Intel 3 process has become one of the company's fastest-growing server products. Clearwater Forest, the first server product based on the Intel 18A process, has also begun shipping and revenue has been recognized. The company expects that demand for related products will remain strong in 2027, especially for applications in high-density CPU and intelligent rack-level infrastructure.
Purpose-built silicon is also Intel’s focus. Chen Liwu said that Intel also continued to see strong momentum in specialized customized chips, with its revenue increasing by more than 50% month-on-month and more than doubling year-on-year. This means that Intel hopes to further expand its dedicated custom chip, advanced packaging and external wafer foundry business in addition to traditional general-purpose CPUs.
However, rising demand for server CPUs does not mean Intel can immediately convert market demand into revenue. Chen Liwu admitted frankly that the company is currently facing the problem of insufficient manufacturing supply. In addition to the fact that Intel 3 process production capacity is still limited, the supply shortage of high-end organic substrates required for advanced packaging has also affected Intel's ability to expand server CPU output.
Another pressure comes from the PC market.
Chen Liwu said that in recent weeks, customers have begun to release signals of a slowdown in the PC market based on memory prices and supply conditions. Zinsner predicts that global PC market shipments will fall by approximately 12% in 2026, with the decline in the second half of the year exceeding 20%; PC market shipments in 2027 may also decline by approximately 10%. He said that until memory supply improves and prices return to normal, it will be difficult for the PC market to see a sustained recovery. Inventory adjustments are also exacerbating short-term pressure, and Intel expects fourth-quarter client business revenue to decline by more than 20% sequentially.
In addition, an accident occurred at Intel's Israel factory in October, causing production to be suspended for about two weeks. Zinsner said that preliminary estimates indicate that the incident will reduce revenue by approximately US$300 million in the fourth quarter and drag down gross profit margin by approximately 2 percentage points. The first quarter may also be affected by a similar scale. The incident also affected Intel's shipments of 10-nanometer server products in the fourth quarter. The company is evaluating whether the wafers on the production line can continue to be used.
In terms of manufacturing technology, Intel has released some positive signals. Chen Liwu said that the yield rates of Intel 3 and Intel 18A processes continued to improve in the third quarter, with Intel 18A yields achieving double-digit growth quarter-on-quarter, and the wafer output of both processes exceeded expectations. Intel 18A-P is still planned to be used in internal products before the end of the year, and Intel 14A is also advancing as planned, and version 0.9 process design kit (PDK) has been released to some customers in October. The company said that this version has reached industry standard yield and performance indicators when released.
Zinsner said that 2027 will be Intel’s investment year. As the Intel 18A and Intel 3 processes ramp up, and in preparation for Intel 14A to start production in 2028, the company needs to undertake multiple investments in the same year, so it is expected that it may not be able to achieve positive free cash flow in 2027. Intel hopes to expand production capacity and improve product yield and manufacturing efficiency through continued investment, thereby converting the demand brought by AI infrastructure into long-term revenue and profits.
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