Intel Corp CEO Pat Gelsinger on Thursday 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.com Inc and Alphabet Inc’s Google —whose purchases of server chips for data centers 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 percent year-on-year decline in sales might 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 Inc, and increasingly from the internal chip-design efforts of major cloud customers, which are keen to supply their own parts. Sales to those cloud providers like Amazon’s AWS and Google dropped 20 percent in the recent period, Intel said in its second-quarter earnings report.
Gelsinger projected double-digit percentage sales increases for the data center 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 center unit, known internally as DCG, is a bellwether for the progress of Gelsinger’s drive to restore Intel to leadership of the industry.
The company said sales in the current period would be about US$18.2 billion, compared with an average analyst projection of US$18.3 billion. Shares fell about 2.8 percent in extended trading following the announcement. They had earlier closed at US$55.96 in New York, leaving them up 12 percent this year.
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 percent to US$18.5 billion, exceeding average predictions for revenue of US$17.8 billion.
Annual sales for this year would 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, Edward Jones analyst Logan Purk said.
Investors want companies to set more ambitious targets, he said.
They are also concerned that Intel is never getting back to the 99 percent-plus share of the server chip market it once commanded, and would 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, “it will decline over time and these hyperscalers will begin to supply themselves,” he said.
Gelsinger offered a far more upbeat outlook for personal computer sales, saying 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 would grow again next year.
A dearth of semiconductors across many parts of the electronics industry would hit bottom in the second half of this year and persist until as late as 2023, Gelsinger said.
When asked about reports that he has considered trying to purchase chip manufacturer GlobalFoundries Inc to accelerate that effort, Intel’s leader declined to comment.
“At this point, we would not say that M&A [merger and acquisition] 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.”
Intel said its adjusted gross margin would be 56.5 percent this year. For the third quarter, that measure would be 55 percent, narrower than analysts estimated. The company has historically delivered margins wider than 60 percent.
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