On Thursday, Intel Corporation (INTC  ) returned to profitability after having posted its largest ever loss in the first quarter. With the slow recovery of the PC business, Intel also issued a better-than-expected third quarter guidance despite persisting challenges.

Second Quarter Highlights

For the quarter that ended on July 1st, revenue contracted 15% YoY to $12.9 billion, marking the company's six straight quarter of sales decline. But it was still above Refinitiv's consensus estimate of $12.13 billion.

After two consecutive quarters of losses, Intel reported a net income of $1.5 billion, or 35 cents per share. During last year's comparable quarter, Intel posted a net loss of $454 million, or 11 cents per share. Adjusted earnings per share amounted to 13 cents, topping Refinitiv's estimate of a loss of 3 cents.

Adjusted gross margin almost reached 40%, exceeding the company's previous forecast of 37.5%, while it is expected to expand further as Intel continues to heavily invest in its manufacturing capacity.

Third Quarter Guidance

Adjusted earnings are expected to amount to 20 cents per share on midpoint sales of $13.4 billion, both topping analyst expectations of 16 cents per share on $13.23 billion in sales.

'Five nodes in four years' cannot happen over night

Intel management emphasized that the undergoing turnaround will take time as the company tries to catch up to the capacity Taiwan Semiconductor Manufacturing Company Limited (TSM  ) has in chip-manufacturing processes by 2026. Intel reaffirmed it remains on track towards achieving that goal. But even TSMC experienced a revenue decline in its second quarter. As a result, TSMC shares took a 5% plunge upon the report. Despite the AI boost, even TSMC, the world's leader in chip production experienced a 10% drop in sales and margin pressures as 2021's chip supply shortages have turned into a glut.

Challenges Remain

Intel CEO Pat Gelsinger recognized that persistent weakness is plaguing all business segments and it is expected to continue doing so until the end of the year as server chip sales will remain weak until the fourth quarter. It certainly does not help that cloud companies are securing graphics processors for AI as opposed to choosing Intel's central processors.

Intel's better than expected results are mostly owed to its effective cost-cutting efforts that resulted in $3 billion in savings. With layoffs and the slashed dividend, among other measures, Intel plans to save $10 billion per year by mid-decade. Intel is undoubtedly going at a slower pace than TSMC who is the world's largest contract chip maker, along with being the supplier of Apple Inc (AAPL  ) and Nvidia Corporation (NVDA  ), but Intel will be fighting for its place under the AI sun.

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