(Bloomberg) — Intel Corp., the world’s largest semiconductor manufacturer, released a poor third-quarter sales forecast, indicating that its data center chip business continues to lose market share in the face of fiercer competition.
Revenue in the current period will be about $18.2 billion, Intel said in a statement Thursday. That compares to average analyst forecasts of $18.3 billion. Adjusted gross margin, a measure of profitability, will be approximately 55%, the company said, and earnings per share are expected to be $1.10.
While demand for Intel’s lucrative server chips improved from the prior period in the second quarter, investors focused on the division’s 9% drop in revenue as a sign that a recovery is not yet underway. Intel’s Xeon chips, some of which are as expensive 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 Google from Alphabet Inc., to provide 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 big to expand its reach in manufacturing to pose a bigger challenge to Taiwan. Semiconductor Manufacturing Co. and Samsung Electronics Co.
Shares of the company fell about 2.8% during extended trading following the announcement. They previously closed in New York at $55.96, up 12% this year. Intel, of Santa Clara, California, said second quarter earnings, excluding certain items, were $5.2 billion, or $1.28 per share. Sales rose 2% to $18.5 billion. On average, analysts had forecast earnings of $1.07 per share on revenue of $17.8 billion.
The company’s PC chip business slightly outperformed estimates in the second quarter, helping to allay concerns that demand for notebooks would fall as pandemic-related lockdowns end working from home and studying. In an interview Thursday, Gelsinger also predicted that the PC market will continue to grow in 2022. For the year, Intel said adjusted sales will be about $73.5 billion ahead of forecasts.
In the first quarter, Intel’s server chip sales fell 20%. At the time, executives explained that it was a temporary phenomenon caused by the largest customers working their way through inventories of unused chips. Analysts expressed concern about AMD’s loss of market share and major customers’ in-house chip design efforts using outsourced manufacturing. AMD subsequently reported strong growth in its server chip business, adding evidence of market share gains over Intel. Gelsinger’s predecessors left him with a company that had fallen behind TSMC and Samsung in chip technology. The loss of dominance in that critical area has left Intel more vulnerable to competition than it has been in a decade. The board brought back Gelsinger, who started his career at Intel as a teenager and worked his way up the tech ranks to remedy that. Since the acquisition, he said Intel will fight hard for every order in a more difficult environment and increase spending on creating a new unit that will allow customers, and even competitors, to use the factories to create their own designs.
Intel falls on latest server chip delay; Rival AMD Earnings
His sense of urgency is justified. In 2019, Intel’s revenue was double that of TSMC. In 2023, analysts estimate they will be about the same size. At that point, both could be looking at Samsung’s chip unit revenue, based on projections. Of the three, Intel is the only one estimated to report lower revenues in 2021 than last year.
Intel’s products have not played the main role in the shortages currently holding back production for everything from pickup trucks to game consoles. The company, whose own manufacturing facilities produce the majority of chips sold, had increased factory capacity before demand for laptops picked up last year.
The company’s reliance on its own factories is both a strength and a weakness. In the past year, many car companies and electronics manufacturers have struggled to get sufficient supply from outsourced manufacturers. But Intel’s in-house manufacturing network has largely kept pace with demand for PC and server processors.
Still, Intel’s output comes from an outdated manufacturing process and the company has fallen short of its own deadlines for introducing new technology. That means 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, but warned that it will take time to deliver results, and could hurt the company’s profitability in the meantime. Intel said its adjusted gross margin, or the percentage of sales left over after manufacturing costs, will be 56.5% this year. For the third quarter, that measure will be 55%, narrower than analysts had estimated.
(Updates with details from the report, comments from the CEO from the third paragraph.)
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