Intel’s Q2 earnings and guidance far exceed expectations, driven by AI demand and the fastest growth in 15 years

Author: SoSoValue Research

Intel releases 2026 Q2 results: revenue, adjusted EPS, and gross margin all significantly above market expectations. Data center and AI business posted the fastest growth in the company’s history, and the client business also outperformed expectations. The company’s Q3 revenue guidance continues to materially exceed consensus expectations, indicating that AI infrastructure buildout is once again driving demand for server CPUs, custom chips, and wafer manufacturing.

At the same time, the company raised its 2026 capital expenditure guidance from $18 billion to more than $20 billion, and expects 2027 spending to increase significantly further, providing support for the semiconductor equipment, cleanroom, advanced packaging, substrates, and memory supply-chain industries.

However, Intel Foundry still recorded operating losses of more than $2 billion, and the share of revenue from external foundry outsourcing remains low; the rapid expansion of capital expenditures will continue to test cash flow. Intel’s stock rose by about 13% after hours, before gains narrowed to around 4%.

Q2 results: revenue, profit margins, and cash flow—fully beat expectations, but cash flow still dragged by special items

Q2 revenue was $16.13 billion, up 25.4% year over year, the fastest growth in 15 years. It beat consensus expectations of about $14.4 billion and also exceeded the midpoint of the company’s prior guidance by $1.8 billion.

Adjusted EPS was $0.42, nearly double the market expectation of $0.22. Adjusted gross margin was 41.8%, up 12.1 percentage points year over year, and 2.8 percentage points higher than the company’s guidance. Revenue growth, higher average selling prices, improved product mix, and improved process yields jointly drove adjusted operating profit to $2.8 billion, versus a loss of $0.5 billion in the same period last year.

GAAP net loss was $11 billion, EPS was -$2.16, mainly due to a $12.5 billion non-cash fair value loss related to shares held in custody with the U.S. Department of Commerce. Excluding the related adjustments, the company generated net profit of $2.2 billion.

Q2 operating cash flow reached $7 billion. Cash and short-term investments were about $30 billion. However, affected by a net outflow of $12.2 billion from partner funding, adjusted free cash flow was -$8.4 billion. Since Q2’s own capital expenditures were $2.7 billion, the negative free cash flow more reflects partner funding arrangements; with further increases in manufacturing and backend capacity investment in 2027, improvements in cash flow may still be delayed.

Data center growth of 59%, client business better than expected but PC demand under pressure

Revenue from the data center and AI business was $6.26 billion, up 59% year over year and up 24% quarter over quarter, significantly above market expectations of about $5.4 billion. Operating profit rose to $2.47 billion, and the operating margin increased from 16.1% in the prior-year quarter to 39.5%.

Growth was mainly driven by strong demand from hyperscale cloud customers and enterprise clients for server CPUs. Custom chip revenue was nearly double the growth rate year over year; its annualized revenue scale is approaching $2 billion. Intel expects server CPU industry shipments to maintain strong double-digit growth in 2026 and 2027, with the growth momentum potentially continuing into 2028.

Client and physical AI business revenue was $8.88 billion, up 13% year over year, above market expectations of about $8.0 billion. AI PC revenue rose 26% quarter over quarter and is now about two-thirds of client business revenue; edge computing contributed about 10%.

Client business growth was mainly driven by a higher share of high-end products, higher average selling prices, and cost pass-through. Due to rising storage prices and supply constraints, the company expects global PC unit consumption in 2026 to decline by a low double-digit percentage, and performance in the second half will also be weaker than normal seasonal levels. Intel plans to shift more limited capacity to data center CPUs with stronger demand.

Foundry losses continue to narrow, but external customers still need to deliver

Intel Foundry revenue was $5.77 billion, up 31% year over year. Operating loss narrowed from $3.17 billion in the prior-year quarter to $2.09 billion, and the loss rate fell from 71.7% to 36.2%.

18A output grew more than 50% quarter over quarter, about 25% above the company’s target. Improved yield, production cycle times, and capacity utilization lowered manufacturing costs for Panther Lake’s main products by about 50% within the year. The company expects to further reduce costs by about 20% before year-end.

18A-P has already entered risk production; the PDK 0.9 for 14A is scheduled for delivery in October. Risk production is expected to begin in the second half of 2027, with mass production in 2028.

However, this quarter Foundry’s external revenue was only $293 million, accounting for about 5% of the business’s revenue. Growth is still mainly driven by Intel’s internal products. Management said feedback from external customers has been positive, but it has not yet disclosed large mass-production orders that can validate the commercial attractiveness of 18A-P or 14A.

Earnings call: supply gaps persist, and capital spending still requires order validation

Management said advanced-node logic chips, silicon wafers, memory, substrates, and advanced packaging are facing severe supply constraints, and shortages are expected to continue. Some bottlenecks may ease by the end of Q3 into Q4, providing further upside for Q4 revenue, but the company expects it still will not be able to fully meet server CPU demand before year-end.

Capital expenditure increases are based on long-term customer agreements and demand signals, but the company has not disclosed how much of the additional investment maps to external Foundry customers, nor has it confirmed that 14A or 18A-P has received formal mass-production orders from major customers.

Intel currently has about $40 billion in liquidity and holds about $10 billion in non-core assets available for disposal. Management also said that if future capacity expansion needs exceed the ability of internal cash flow and customer prepayments to support, the company may enter capital-market financing. Whether 2027 capital investment can deliver effective returns will depend on how long server demand lasts, the pace of cost reductions for 18A, and how well external foundry orders are converted.

Q3 guidance significantly beats expectations; capital expenditures in 2027 continue to rise

Intel expects Q3 revenue of $15.8 billion to $16.8 billion, with a midpoint of $16.3 billion, up about 19% year over year, above consensus expectations of about $15.1 billion. Adjusted EPS is expected to be $0.38, and adjusted gross margin is expected to be 42%.

Q3 gross margin is expected to be broadly in line with Q2. New products such as Panther Lake and Granite Rapids are still in the early stage of capacity ramp-up, and unit costs are above the company’s average. As 18A yields and production volume continue to improve, new product costs are expected to gradually translate into gross margin support in 2027.

The company raised its 2026 capital expenditure guidance from $18 billion to more than $20 billion and expects 2027 capital expenditures to be significantly higher than in 2026. The incremental investment is expected to cover Intel 3, 18A, 18A-P, and 14A process nodes, advanced packaging and EMIB-T, cleanroom construction, as well as ensuring supply for substrates and memory.

This earnings report shows that Intel is regaining growth opportunities from the AI infrastructure cycle. Revenue and profit are being rapidly improved by the ramp-up of server CPUs, custom chips, and 18A capacity, and the Q3 guidance also proves that current demand remains strong.

After-hours gains narrowed from about 13% to about 4%, reflecting that the market has started applying higher valuation standards: short-term results beating expectations supports the recovery narrative, and Foundry external revenue, advanced-process customer wins, capital returns, and free cash flow will determine whether this round of recovery can further translate into sustainable valuation upside.