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Intel’s Sales Forecast Falls Short as Data Center Unit Sags

Intel’s Sales Forecast Falls Short as Data Center Unit Sags

(Bloomberg) — Intel Corp., the world’s biggest semiconductor maker, gave a lackluster third-quarter sales forecast, indicating its data-center chip business continues to suffer market-share losses in the face of stiffer competition.

Sales in the current period will be about $18.2 billion, Intel said in a statement Thursday. That compares with average analyst projections of $18.3 billion. Adjusted gross margin, a measure of profitability, will be about 55%, the company said, and per-share profit is forecast to be $1.10.

While demand for Intel’s lucrative server chips improved in the second quarter from the prior period, investors focused on the 9% decline in the division’s sales as a sign that a recovery isn’t yet taking hold. Intel’s Xeon chips, some of which sell for as much as a compact car, are increasingly competing with souped-up offerings from Advanced Micro Devices Inc. and from the internal efforts of major cloud-computing customers, such as Amazon.com Inc.’s AWS and Alphabet Inc.’s Google, to supply their own components.

Chief Executive Officer Pat Gelsinger said Intel’s data-center business will return to strong growth in the second half. Gelsinger, who took the helm in February, has pledged to regain Intel’s technological leadership in the semiconductor industry, and plans to spend heavily to expand its reach in manufacturing to pose a stronger challenge to Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co.

The company’s shares slipped about 2.8% in extended trading following the announcement. They’d earlier closed at $55.96 in New York, leaving them up 12% this year.Santa Clara, California-based Intel said second-quarter profit, excluding certain items, was $5.2 billion, or $1.28 a share. Sales climbed 2% to $18.5 billion. On average, analysts had predicted earnings of $1.07 per share on revenue of $17.8 billion.

The company’s PC chip business slightly topped estimates in the second quarter, helping counter concern that demand for notebooks would drop as pandemic-related lockdowns bring an end to working and studying from home. In an interview Thursday, Gelsinger also predicted that the PC market will continue to expand into 2022. For the year, Intel said adjusted sales will be about $73.5 billion, ahead of predictions.

In the first quarter, Intel’s server chip revenue plummeted 20%. At the time, executives explained that it was a temporary phenomenon caused by its biggest customers working their way through stockpiles of unused chips. Analysts expressed concern that some of that drop-off was market share loss to AMD and large customers’ internal chip design efforts using outsourced production. AMD subsequently reported strong growth in its server chip business, adding to evidence of market share gains against Intel.Gelsinger’s predecessors left him with a company that had fallen behind TSMC and Samsung in chipmaking technology. Loss of dominance in that crucial area has made Intel more vulnerable to competition than it has been in a decade. The board brought back Gelsinger, who started his career at Intel as teenager and worked his way up through its engineering ranks, to fix that. Since taking over, he has said Intel will fight hard for every order in a tougher environment and boost spending on creating a new unit that allows customers, and even competitors, to use its factories to manufacture their own designs.

Intel Falls on Latest Server Chip Delay; Rival AMD Gains

His sense of urgency is warranted. In 2019 Intel’s revenue was double that of TSMC. By 2023 they will be about the same size, according to analysts’ estimates. At that point both might be looking up at Samsung’s chip unit revenue, based on projections.Of the three, Intel is the only one that is estimated to report lower revenue in 2021 than it did last year.

Intel’s products haven’t been central to the shortages currently holding back production of everything from pickup trucks to game consoles. The company, whose in-house production facilities build the majority of the chips it sells, had increased factory capacity prior to the spike in demand for laptops that began last year.

The company’s reliance on its own plants is both a strength and a weakness. In the past year, many automotive companies and electronics makers have struggled to get enough supply from outsourced manufacturers. But Intel’s internal production network has largely kept pace with demand for PC and server processors.

Still, Intel’s output has come from an aging production process, and the company has lagged behind its own deadlines for the introduction of new technology. That means that rival manufacturers have been able to offer chips that they say are technically superior to Intel’s.

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 said its adjusted gross margin, or the percentage of revenue remaining after deducting the cost of production, will be 56.5% this year. For the third quarter, that measure will be 55%, narrower than analysts estimated.

(Updates with details from report, comments from CEO starting in third paragraph.)

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Julia Mangels

Julia has handled various businesses throughout her career and has a deep domain knowledge. She founded Stock Market Pioneer in an attempt to bring the latest news to its readers. She is glued to the stock market most of the times and just loves being in touch with the developments in the business world.

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