According to data analysis firm Dealogic, high-growth but still, loss-making companies dominate the IPO (initial public offering) market in the U.S. stock market in 2020 and 2021. During this period, 150 tech companies raise at least $100 million through IPOs (currently about RMB 691 million).

However, as the proceeds from the deal boom gradually run out, many companies are faced with the difficult choice of either raising money at a higher cost, cutting operating costs significantly, or being acquired by private equity firms or larger competitors.

These companies have benefited from very high valuations, but unless they really do buck the trend, their share prices must have fallen significantly by now,” said Adam Fleisher, a capital markets partner at Carlyle & Associates. They’ll have to find the best fit before things get better.”

Last year’s market downturn led the tech industry to start focusing on profitability and cash flow, yet an analysis of recent earnings reports shows that many tech companies still have a long way to go.

Of the 91 newly public tech companies that have reported earnings so far this year, only 17 have turned a net profit, and the cash burned last year totaled $12 billion. That number could have been even worse if Airbnb hadn’t done so well, with a cash flow of more than $2 billion. On average, these money-burners spent 37% of their IPO proceeds in one year in 2022.

In addition, about half of these 91 companies are operating at a loss. That means these companies can’t save money simply by cutting investments. At the same time, their share prices have fallen by an average of 35% since the IPO. This means that if the company sells further shares, existing investors will have to pay a high price, while the shares will be diluted.

Fleischer said that “some people may sell their shares at low prices if they feel very desperate”, however, so far “action on that front has not been very active”.

Part of the reason for the decline in the company’s valuation is the rise in dollar interest rates, which has reduced the relative value of future earnings for investors. At the same time, the stock’s decline reflects concerns about the near-term outlook, which could increase the challenge of achieving profitability.

Ted Mortonson, a technology sector analyst at U.S. brokerage Baird, said: “The order backlog is in good shape going into 2023, but the question is how to get new orders to replenish it. That’s a common problem, and it’s going to get more difficult in the first half of the year.”

Some companies believe the money raised in better times will be enough to help them weather the current storm. Carmaker Rivian burned through $6.4 billion in 2022, but Claire McDonough, the company’s chief financial officer, said last week that she was “confident” it had enough cash in reserve to last until the end of 2025.

Other companies have not been so lucky. According to Layoff. A platform that tracks company layoffs, at least 38 companies have announced layoffs since they went public, but further cuts may be needed: If last year’s burn rate continues through 2023, nearly a third of companies will run out of cash by the end of the year.

This pressure has led to an increase in M&A deals. Experts expect M&A activity to accelerate again this year.

I believe you will see a lot of companies exiting the public markets,” said Andrea Schulz, a partner at Tootsie & Associates who studies technology companies. Traditionally many companies would have operated in the unlisted state for longer, and perhaps they will now need to stay in the unlisted space for longer.”

Baird’s Mortenson said Thoma Bravo’s recent round of deals provides a blueprint for other private equity firms to follow. thoma Bravo struck a deal last year to acquire information security firm ForgeRock, which was just 12 months away from an IPO. thoma Bravo also acquired two other companies, Ping Identity and SailPoint, both of which go public in 2019 and 2017, respectively.

Private equity firms know that a lot of these companies have to scale, so they’re acquiring different pieces of the puzzle and building platforms like this,” Mortenson said. They can buy when prices are low. In a few years, you’ll see the merged entity go back to the market.”

However, this route may also come with complications that need to be addressed. The U.S. Department of Justice is currently investigating the ForgeRock deal. Schultz said antitrust pressure may cause some large technology companies that have previously been willing to buy other businesses at low prices to change their approach.

In other industries, tough market conditions are driving convertible debt financing. However, convertible bonds issued by high-growth technology companies have previously performed poorly and have also deterred investors. well-known technology companies such as Peloton, Beyond Meat and Airbnb issued zero-percent convertible bonds in early 2021, but now require a significant increase in share prices to meet the threshold for converting the bonds to stock.

The convertible market is currently dominated by larger companies in the “traditional economy,” said Michael Youngworth, a convertible analyst at Bank of America. “Compared to what we’ll see in 2021, the right technology companies with modest bubble terms can still strike a deal, but the conversion premium has to be much lower and the interest rate has to be much higher.”

Some companies are looking for a more direct but costly way to raise capital: a loan. Silicon Valley Bank CEO Greg Becker (Greg Becker) told analysts earlier this year that technology companies have seen a significant increase in loans to the bank, whereas in the past they preferred to finance themselves by selling stock.

For some other companies, those options may not be a good fit. Schultz said the rush to go public at higher valuations has led to issues that companies used to need to address in non-public situations being put into the public market spotlight. “The public will now see issues that previously only venture capital firms could see because these companies will have to go out on the public stage and prove whether there is a competitive or marketable product for them. The results will be mixed. Some of these companies will probably cease to exist, or the teams will be reeled in through M&A deals.”

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Chart Source Pexels

Here are the highlights of Intel’s fourth quarter and full-year results.

• Revenue for the fourth quarter was $14 billion, down 32 percent from $20.5 billion a year ago and down 28 percent on a non-GAAP basis. Full-year revenue was $63.1 billion, down 20 percent from $79 billion in the prior year and down 16 percent on a non-GAAP basis.
• Net loss of $700 million in the fourth quarter compared to net income of $4.6 billion in the same period last year, a 114 percent decline from profit to loss and $400 million on a non-GAAP basis, well below $4.7 billion in the same period last year and down 28 percent year-over-year. Full-year net income of $8.0 billion, down 60 percent from $19.9 billion in the prior year and down 65 percent on a non-GAAP basis year-over-year.
• Fourth quarter loss of $0.16 per share compared to earnings of $1.13 per share in the same quarter last year, a 114 percent decline from earnings per share and a 92 percent decline on a non-GAAP basis to $0.1 per share, well below $1.15 in the same quarter last year. For the full year, earnings per share were $1.94, down 60 percent from $4.86 a year ago, and $1.84 per share on a non-GAAP basis, down 65 percent year-over-year.
• The operating profit margin was negative 8.1 percent in the fourth quarter compared to 24.3 percent in the prior year, a decline of 32.4 basis points, and on a non-GAAP basis, the operating profit margin was 4.3 percent, a decline of 23.9 basis points compared to 28.2 percent in the prior year. Full-year operating margin of 3.7 percent, down 19.9 basis points from 24.6 percent in the prior year and down 19.9 basis points on a non-GAAP basis.
• Fourth quarter gross margin was 39.2 percent, down 14.5 basis points from 53.6 percent a year ago, and on a non-GAAP basis, gross margin was 43.8 percent, down 12.1 basis points from 55.8 percent a year ago. For the full year, the gross margin was 42.6 percent, down 12.8 basis points from 55.4 percent in the prior year, and down 10.8 basis points on a non-GAAP basis.
• Fourth quarter research and development and marketing, general and administrative (MG&A) expenses were $6.2 billion, up 2 percent from $6.0 billion in the prior-year quarter. For the full year, MG&A was $24.5 billion, up 13 percent from $21.7 billion in the prior year and up 14 percent on a non-GAAP basis.

Business Highlights

• In the fourth quarter of 2022, CCG’s 13th generation Intel® Core desktop processor family hits the market, starting with the Desktop K processor and the Intel® Z790 chipset. Additionally, in December 2022, Intel, in partnership with ASUS, officially set a new world record for overclocking, driving the 13th generation Intel Core i9-13900K past the 9 gigahertz mark for the first time.
• In January 2023, DCAI ramped up production with the support of customers and partners to meet a large backlog of demand.
• NEX achieved double-digit revenue growth for the second consecutive year as Intel achieved milestones in key products such as IPU E2000 (Mount Evans), Raptor Lake P&S, Alder Lake N and Sapphire Rapids.
• AXG achieved record revenue in both the fourth quarter and full year.
• IFS achieved record revenue for both the fourth quarter and full year, with aggressive design collaboration with 7 of the 10 largest foundry customers. Intel 3nm also added a leading cloud, edge and data center solutions provider as a customer.
• Intel completed the IPO of Mobileye, which delivered record revenue in the fourth quarter and full year of 2022. The company launched the system in 233 different vehicle models in 2022.

• Executive Commentary
• Despite economic and market headwinds, we continued to make good progress on our strategic transformation in the fourth quarter, including advancing our product roadmap and improving our operational structure and processes to drive efficiencies while achieving the low end of our guidance range,” said Pat Gelsinger, Intel’s chief executive officer. Looking ahead to 2023, we will continue to address short-term challenges while working to deliver on our long-term commitments, including delivering leading products based on open and secure platforms, powered by mass production and supported by our outstanding team.”
• David Zinsner, Intel’s chief financial officer, said, “In the fourth quarter, we took steps to right-size our organization, rationalize our investments and prioritize areas where we can deliver the highest value over the long term. These initiatives reinforce our cost reduction goal of $3 billion in 2023 and set the stage for achieving $8 to $10 billion in reductions by the end of 2025.”

Performance Outlook
Intel provided performance guidance for the first quarter of 2023.

• Effective January 2023, Intel extended the estimated useful life of certain manufacturing machines and equipment from five years to eight years. Compared to the estimated useful life as of the end of 2022, Intel expects total depreciation expense to decrease by approximately $4.2 billion in 2023, with an increase in gross profit of approximately $2.6 billion, a decrease in research and development expenses of $0.4 billion, and a decrease in the value of ending inventory of $1.2 billion in 2023.
• In its outlook for the first quarter of 2023, Intel expects this change to improve operating profit by $350 million to $500 million, or $0.07 to $0.10 per share, with approximately 75 percent going to the cost of goods sold and 25 percent to operating expenses. The change in depreciable life will not be included in the $3 billion cost savings plan for 2023 or in the $8 billion to $10 billion target for 2025 announced in the third quarter 2022 earnings release.
• Intel expects the company to report an adjusted net loss of $0.15 per share on revenue of $10.5 billion to $11.5 billion for the first quarter of 2023. Analysts generally expect the company to report earnings of $0.24 per share on revenue of $13.93 billion.

Earnings Interpretation

• For the fourth quarter that ended Dec. 31, 2022, Intel’s revenue declined 32 percent year-over-year. It was the company’s fourth consecutive quarterly sales decline as the personal computer market retreated from the epidemic boom. The company recorded a net loss of $700 million, compared with a profit of $4.6 billion a year earlier.
• Kissinger said on a conference call with analysts that Intel declined to provide a full-year earnings forecast because of the “current environment of uncertainty. At least in the first half of this year, Intel will deal with “continued economic headwinds. He said the weak economic environment has become more complex due to the expansion of the chip inventory.
• In the fourth quarter, Intel’s customer computing group (including PC chips) contributed $6.63 billion in revenue, down 36 percent and below analysts’ general expectations of $7.68 billion. Intel said demand in the consumer and education markets fell sharply and customers reduced their inventories. Market research firm Gartner said the personal computer market has shrunk more than any other quarter since it began tracking the industry in the 1990s.
• On Jan. 12, Intel projected the total target market for personal computers in 2023 at 270 million to 295 million units. On Thursday, the company said it now expects the market to be at the end of that range.
• The data center and AI division, which consists of server chips, memory and field-programmable gate arrays, recorded revenue of $4.3 billion, down 33 percent, but still above analysts’ general expectations of $4.17 billion. Intel said it was experiencing competitive pressure and a decline in market size.
• Intel’s networking and edge division, which includes networking products, posted revenue of $2.06 billion, which was down 1 percent from a year ago and below analysts’ general expectations of $2.26 billion.
• Geerzinger said the current business environment “is driving short-term underloads in our factory networks. Intel Chief Financial Officer Zinsner explained on the conference call that underload charges from underutilized factories narrowed Intel’s gross margin by 220 basis points (2.2 percent) in the fourth quarter and that loading issues in the first quarter would have reduced gross margin by 400 basis points.
• In the fourth quarter, Mobileye, the self-driving hardware and software provider Intel acquired for $15.3 billion in 2017, debuted on Nasdaq, and Intel still controls a majority of the voting rights in Mobileye’s common stock.
• Intel remains the largest U.S. chipmaker by revenue. The semiconductor company has seen an apparent shift toward an oversupply of chips amid concerns about the recession, and a shortage of chips driven by all-digital demand during the height of the new crown pneumonia outbreak. Intel’s market share has also been consistently eroded by competitors such as AMD and semiconductor companies using technology from Arm, a British chip design specialist.
• Kissinger said Intel has launched a massive layoff drive, but the cuts will continue in the first half of the year as the company works to meet a $3 billion spending cut target. “We’re executing cost measures more aggressively,” he said. The CEO said the company has exited seven businesses and saved $1.5 billion since he rejoined in 2021. He added that the company is ending its investment in certain networking hardware.
• Chip companies, including Intel, have cut production schedules and reduced capital spending, including computer memory giants Samsung Electronics and Micron Technology, which play a key role in a segment of the chip market that is seen as a leading indicator of technology demand.
• In the race to make the fastest chips with the smallest transistors, Intel has fallen behind its chip-making rivals in Asia, though Kissinger has laid out plans to return to the lead in a few years. Despite Intel’s spending cuts, it continues to push for unprecedented expansion plans to scale up its chipmaking plants.
• Fueled by potentially billions of dollars worth of government grants and U.S. tax breaks, Intel is building new plants in Arizona, Ohio and Germany and expanding operations elsewhere. Intel executives said they remain committed to major projects, although the company has delayed the start of construction on the German plant because of the worsening market outlook and has taken other money-saving initiatives.
• Kissinger acknowledged, “We are adjusting our near-term spending to manage the cost environment while maintaining our long-term strategic investments. This will be a journey that will last for many years.”

Stock price movement

• Intel shares rose $0.39, or 1.31 percent, to close at $30.09 per share on Thursday, local U.S. time. However, the stock plunged nearly 10 percent in after-hours trading as revenue and first-quarter revenue missed expectations. Over the past 12 months, Intel shares have fallen about 42 percent, while the Standard & Poor’s 500 indexes have fallen 7 percent over the same period.
• In the past 52 weeks, Intel shares have traded as high as $52.51 and as low as $24.59. Based on Thursday’s closing price, Intel’s market capitalization is about $124.2 billion.

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