Intel slashes forecasts amid decline in data-center sales

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(Bloomberg) --Intel Corp. slashed its second-quarter and annual sales forecasts, undermining confidence in the company’s assurances that demand for computer processors would improve as 2019 progresses. Shares tumbled in late trading.

Revenue in the current period will be about $15.6 billion and net income will be 83 cents a share, the Santa Clara, California-based company said Thursday in a statement. That compares with average analysts’ estimates of $16.9 billion and 96 cents a share, according to data compiled by Bloomberg. Sales for the year will be $69 billion, Intel said, below analyst projections of $71.3 billion.

Chief Executive Officer Bob Swan, who was permanently promoted from the chief financial officer role in January, is struggling to prolong a run of record earnings and fend off burgeoning semiconductor-industry competition that threatens Intel’s dominance. The key to the company’s financial health has been demand from cloud-computing providers for chips used in servers, Intel’s priciest and most profitable products. In the first quarter, that business declined 6.3 percent from a year earlier, snapping a run of gains that had fueled the company’s overall growth even as the personal-computer market languished.

Swan said Intel is dealing with the hangover of "explosive growth" in 2018 and customers are working through their stockpiles of unused parts. He’s now predicting sales in the data-center division will decline in 2019, its first annual contraction in a decade.

"Last year we had outstanding growth and we were expecting a slowing in data center," he said in an interview after the report. "It’s going to take a little longer than we anticipated." Swan also said that the steeper-than-expected drop in orders for some of his business had been more pronounced in China, where the company gets about a quarter of its annual revenue. "China headwinds have increased."

Intel shares slumped 7 percent in extended trading following the announcement. They had earlier slipped 1.9 percent to $57.61 at the close in New York, leaving them up 23 percent this year. That performance trails the benchmark Philadelphia Stock Exchange Semiconductor Index’s 35 percent advance.

Overall sales in the first quarter were little changed at $16.1 billion. Analysts on average had predicted $16.03 billion in revenue. Net income slipped to $3.97 billion, or 87 cents a share, while analysts had projected 82 cents. In last year’s first quarter, Intel posted earnings of $4.45 billion, or 93 cents. Gross margin, or the percentage of sales remaining after deducting the cost of production, was 56.6 percent in the quarter. Intel’s target range for that key indicator of efficiency for a manufacturing company is above 60 percent.

The data-center unit’s decline contrasted with growth of 9 percent in the fourth quarter. In January, Intel executives predicted that orders would pick up once customers worked through stockpiles of unused chips. 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.

Cloud-computing companies such as Inc., which reported strong earnings Thursday, have ordered massive amounts of equipment to meet the insatiable demand for data processing. Such spending has been one of the key drivers of growth in the chip industry over the past few years. With its cautious outlook, Intel joined other chipmakers, such as Xilinx Inc. and Texas Instruments Inc., in signaling that massive spending on infrastructure isn’t going to come raging back this year.

The challenges weren’t confined to server chips. In memory, Intel’s investments in a new type of semiconductor weren’t able to cushion it from a decline in the price of industry-standard parts it makes. Operating losses in that business widened to $297 million in the quarter, compared with a loss of $81 million in the same period a year earlier. Swan said the unit will have to do a better job of providing a return on investments, adding that he would look at options including partnerships with other companies.

Intel also announced earlier this month that it will wind down a multibillion-dollar, decades-long effort to stake a claim in chips for the mobile-phone industry. After Intel’s one significant customer, Apple Inc., said it will return to using Qualcomm Inc. for its iPhones, Intel said it will stop developing chips for 5G smartphones and will complete an assessment of the opportunities for modems in personal computers and other devices.

Though the server market is more profitable, Intel still gets the majority of its revenue from the PC market, and its processors are the main component in most of the world’s laptops and desktops. That business posted first-quarter sales of $8.59 billion, up 4.5 percent from a year earlier. Shortages of some parts, caused by manufacturing issues at Intel’s plants, have limited shipments of PCs in recent quarters. Swan said those shortages will continue through the first half of the year.

"Why are we still seeing CPU shortages from Intel? Companies are still having a hard time getting CPUs," said Weston Twigg, an analyst at Keybanc Capital Markets Inc., referring to the central processing unit of PCs. "Why are they leaving the window open for competitors to gain share?"

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 that it wouldn’t mass-produce semiconductors made with 10-nanometer technology until later this year. That may put it behind chipmaking rivals such as Taiwan Semiconductor Manufacturing Co.

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