Intel CEO says worst of sales slump is over but server-chip woes prove a drag on revenue forecast
- While demand for Intel’s server processors picked up in the second quarter, the division’s 9 per cent year-over-year decline in sales may signal a long recovery
- The company’s PC business slightly topped estimates, helping boost overall sales, which climbed 2 per cent to US$18.5 billion in the quarter
Intel Corp Chief Executive Officer Pat Gelsinger said the worst of a sales slump has passed and struck a bullish tone about the chipmaker’s prospects for the rest of the year and beyond. Investors are waiting to see proof that the company can regain dominance in the semiconductor industry.
The key to winning them over will be Gelsinger’s ability to lure back some of the largest companies in technology – cloud giants like Amazon and Alphabet’s Google – whose purchases of server chips for data centres have been a main engine of Intel’s profit and growth.
While demand for Intel’s server processors – its most lucrative business – picked up in the second quarter from the first, investors fretted that the division’s 9 per cent year-over-year decline in sales may signal a long road to recovery.
Intel’s Xeon chips, some of which sell for as much as a compact car, compete for business with souped-up offerings from Advanced Micro Devices, and increasingly from the internal chip-design efforts of major cloud customers, who are keen to supply their own parts.
Sales to those cloud providers like Amazon’s AWS and Google dropped 20 per cent in the recent period, Intel said on Thursday in its second-quarter earnings report.
Gelsinger projected double digit-percentage sales increases for the data centre business as a whole in the second half of the year, and said he expects pricing and market share to remain stable.
Still, prices dropped in the June quarter because of competitive pressure, and the unit will not match its revenue total for 2019 this year, he said. The performance of the data centre unit, known internally as DCG, is a bellwether for the progress of Gelsinger’s drive to restore Intel to leadership of the industry.
Gelsinger, 60, who took the helm in February, has pledged to restore Intel’s technological leadership in the semiconductor industry, following a spate of production issues that delayed some of its most advanced chips.
He has outlined plans to spend heavily to expand its reach in manufacturing to pose a stronger challenge to Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.
The company said sales in the current period will be about US$18.2 billion, compared with an average analyst projection of US$18.3 billion.
In the second quarter, the company’s personal computer business slightly topped estimates, helping boost overall sales. Santa Clara, California-based Intel said sales in the period climbed 2 per cent to US$18.5 billion, exceeding average predictions for revenue of US$17.8 billion.
Annual sales for 2021 will exceed the company’s previous target, Intel projected.
Those numbers were not enough to raise optimism about Intel’s lukewarm performance against the backdrop of strong demand for semiconductors in general and widespread industry shortages, according to Edward Jones analyst Logan Purk.
Investors want companies to set more ambitious targets, he said. They are also concerned that Intel is never getting back to the 99 per cent-plus share of the server chip market it once commanded, and will remain too dependent on PCs.
“I think it boils down to PC sales driving a bulk of outperformance, which likely reverses soon,” Purk said. In data centers, he said, “it will decline over time and these hyperscalers will begin to supply themselves.”
Gelsinger offered a far more upbeat outlook for personal computer sales, arguing that many households are now home to multiple devices and that a lot of older machines are due for replacement. He projected the PC market will grow again next year.
A dearth of semiconductors across many parts of the electronics industry will hit bottom in the second half of this year and persist until as late as 2023, Gelsinger said, echoing comments he made last month.
That is driving his optimism about the need for Intel’s expansion into the foundry business, where Gelsinger plans to build new plants that will be open to the production of designs by other companies, even competitors.
“At this point, we would not say that M&A is critical, but nor would we rule it out,” he told analysts on a conference call. “Our view is that industry consolidation is very likely.”
Investors and analysts have welcomed Gelsinger’s ambitious approach, while cautioning that it will take time to deliver results, and in the meantime could dent the company’s profitability.
Intel on Thursday said its adjusted gross margin, or the percentage of revenue remaining after deducting the cost of production, will be 56.5 per cent this year. For the third quarter, that measure will be 55 per cent, narrower than analysts estimated. The company has traditionally delivered margins wider than 60 per cent.