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Intel CEO says chipmaker sees low, single-digit sales growth

(Bloomberg) --Intel Corp. Chief Executive Officer Bob Swan gave new long-term forecasts that indicate the chipmaker’s growth will remain stalled. His comments, during his first investor event as CEO, sent shares down 2.5 percent at the close of trading in New York.

Intel last month said sales will decline in 2019 and it reduced forecasts for profit and revenue in the current quarter. Swan on Wednesday said the chipmaker let investors down when it cut the guidance.

“I do just want to acknowledge the present,” Swan said at the company’s headquarters in Santa Clara, California. “We let you down. We let ourselves down.”

While sales of the company’s data-centric products -- a term coined to include server and other chips such as artificial intelligence processors -- will expand at a percentage in the high-single digits, the unit’s growth won’t be enough to overcome the sluggish PC market, he said. Total revenue will increase by low, single-digit percentages over the next three years, Swan said.

PC sales declined 4.6 percent globally in the first quarter, after a similar decline in the fourth quarter of 2018, according to analyst Gartner Inc. Sales of Intel’s main PC processor business will decline or be unchanged during the next three years, Swan said.

Swan said that over the past three years, the company has increased revenue and profit at a stronger pace than its projections. The recent history, however, doesn’t excuse executives for failing to anticipate the slowdown in their key market for server computer processors, he said. Intel needs to improve its “execution rhythm” and will focus more on changing itself to respond to new markets, said the CEO, who took the role permanently in January after serving as interim leader for more than six months.

Intel’s leadership is facing a skeptical audience. While the company said a dimming outlook for earnings is due to weakening demand, analysts have pointed to increasing competition and the company’s manufacturing stumbles.

Bob Swan CEO Intel.jpg
Bob Swan, interim chief executive officer and chief financial officer of Intel Corp., reacts during the inauguration of the company's research and development facility in Bengaluru, India, on Thursday, Nov. 15, 2018. Intel’s processors are the heart of more than 90 percent of the world’s laptops and almost all server computers. Photographer: Samyukta Lakshmi/Bloomberg

The stock is the worst performer on the Philadelphia Stock Exchange Semiconductor Index this year, having gained 4.9 percent to $49.24 at Wednesday’s close.

A chunk of that slide came after the company, the world’s second-largest semiconductor maker, cut its second-quarter outlook on April 25 and said revenue will decline in 2019. The stock has lost ground in 8 of 9 trading sessions since then.

At the heart of the concerns are signs of competition for Intel’s lucrative server chip business and the company’s lack of progress in production technology. Investors are concerned Swan can no longer rely on the server unit and technical leadership to continue a record run of earnings growth.

Intel’s data-center unit sales declined 6.3 percent in the first quarter from a year earlier. That undermined the company’s assertions that demand would increase as the year progresses. Intel has said that spending on servers “paused” while customers, who ordered at a frantic rate last year, work through their inventory stockpiles. Intel’s Xeon processors account for more than 95 percent of the market for chips that run servers, the machines that provide the backbone of the internet and corporate networks.

Intel needs to change its culture, Swan said. It can no longer make good products and expect customers to come. The company needs think of itself as having a much lower share of bigger markets and aim its products to customers’ needs, he said.

The company has been struggling to shift its factory network to more advanced techniques. That’s left Intel and the computer industry short of manufacturing capacity. In response, the company prioritized making chips that it can charge more for -- server and high-end desktop processors -- causing a scarcity of supply, particularly for cheaper laptops.

Intel initially sparked concern last year that it may be losing its edge in manufacturing when the company confirmed it wouldn’t mass produce semiconductors made with 10-nanometer technology until later this year. That may put it behind rivals such as Taiwan Semiconductor Manufacturing Co.

Swan stressed that Intel will focus on profitability and returns as he evaluates the company and its markets. The modem business failed to achieve returns and Intel is considering what to do with the unit after losing Apple Inc. as a customer. While Intel still expects its new technology in the memory chip business to succeed, the Nand flash business isn’t delivering the expected returns and the company won’t build any more capacity for that type of chip, Swan said.

Intel has learned lessons from its failure to bring 10-nanometer manufacturing to the market on time, said Chief Engineering Officer Murthy Renduchintala. The delays were caused by over ambition and trying to include too many enhancements at once, he said. The timeline for the debut of chips made with 10-nanometer remains the end of this year, he said. The first chip on its successor, 7 nanometer, will come in 2021, he said.

Bloomberg News