Intel shares fell more than 8% in extended trading on Thursday on a weaker-than-expected sales report and after the company blamed an industry-wide component shortage for its PC chip business shrinking 2% during the quarter ending October 2.

Intel also warned on Thursday that its gross margin and free cash flow would decline to a lower level over the next two to three years as it invests in research and development and builds new chip factories.

Here’s how Intel did versus Refinitiv estimates:

  • EPS: $1.71, adjusted, versus $1.11 expected.
  • Revenue: $18.1 billion, adjusted, versus $18.24 billion expected.

Intel said it expected around $18.3 billion in adjusted sales in the fourth quarter, compared with analysts’ expectations of $18.24 billion.

Intel’s largest business, its client computing group, was down 2% year-over-year to $9.7 billion. That includes PC chip revenue. Intel said that PC sales were down primarily due to lower laptop volumes because of the chip shortage, and that its customers may have lacked other parts it needed to finish assembling computers.

“We call it match sets, where we may have the CPU, but you don’t have the LCD, or you don’t have the Wi-Fi. Data centers are particularly struggling with some of the power chips and some of the networking or ethernet chips,” Intel CEO Pat Gelsinger said in an interview with CNBC.

Gelsinger said that PC demand was still strong and he didn’t expect the semiconductor shortage to end until 2023.

“We’re in the worst of it now, every quarter next year we’ll get incrementally better, but they’re not going to have supply-demand balance until 2023,” Gelsinger said.

PC sales have been strong for the last year as consumers around the world needed new laptops and desktops to work from home. But the pandemic-related PC surge may be coming to a close as sales slow, according to analysts.

Gelsinger said he believed that the increase in PC sales was likely a trend that will continue. “We do think the PC business is now just structurally larger, a million units-a-day kind of business,” Gelsinger said.

Intel’s Data Center Group, which sells processors and other silicon for data centers, produced $6.5 billion in sales, up 10% year-over-year, but fell short of analyst estimates of $6.66 billion. Intel said that the annual increase was due to increased demand for on-premise servers for corporations and governments.

Intel is in a period of massive capital expenditure as it spends $20 billion this year, including on a new semiconductor factory in Arizona. Investors are closely watching Intel’s gross margin as the company spends on ramping up new production lines to catch rivals in semiconductor performance.

Intel said its gross margin, the revenue left after accounting for the cost of goods sold, will decline, though it won’t drop below 50%, and after that it will recover. For the third quarter, Intel reported a gross margin of 56%.

The company plans to shift its business model to become a manufacturer, or foundry, for other chip designers, in addition to continuing to design and manufacture its own processors.

The quest to become a foundry is an expensive initiative that could have its costs defrayed by government support in the U.S. and Europe, but could be extremely lucrative if the semiconductor industry doubles in size over the next 10 years, as Intel has predicted.

During the quarter, Intel signed up the U.S. government as a foundry customer, Intel said.

Intel’s gross margin during the quarter was 56%, up 2.9% year-over-year. It also saw growth in its internet of things group, which increased 54% to $1 billion, and Mobileye, its automotive chip subsidiary, which grew 39% to $326 million.

Intel CFO George Davis announced plans to retire in May 2022.

Intel is likely to provide more details on how it sees the transition to becoming a foundry and its views on its technology roadmap next month at its analyst day, which the company moved to next February on Thursday. It was previously scheduled for November.



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