Intel CEO Sees Prolonged Chip-Supply Constraints

By Paul Ziobro 

Intel Corp.'s new chief executive said a global chip-supply shortage could stretch two more years as the U.S. semiconductor giant posted weaker quarterly earnings.

Pat Gelsinger said the supply constraints that have affected some sectors of the global economy for months will continue until more capacity comes online to meet chip demand for everything from automobiles to electronics.

"This will take a while until people can put more capacity in the ground, " he said in an interview. "It's just the way it is when you're building new factories."

The CEO, who is fast-tracking efforts to re-energize the company, said the outlook projecting sales of $77 billion this year, $500 million higher than previously expected, is a "supply constrained guide" for the year.

Intel on Thursday said first-quarter sales fell 1% to $19.7 billion. Net income, weighed down by costs of a legal settlement, was $3.4 billion. Excluding the pending sale of its memory business and other items, Intel said revenue was $18.6 billion and net income was $5.7 billion. Wall Street on average expected the company to report first-quarter sales to $18.6 billion, including sales from the memory business, and net income of $4.3 billion, according to analysts surveyed by FactSet.

Intel's stock fell around 1.3% in after-hours trading.

Mr. Gelsinger this month laid out an ambitious strategy for Intel to become a major contract chip maker in addition to making semiconductors to satisfy its in-house requirements. The plan includes a $20 billion spending commitment to build two new semiconductor plants in Arizona. "This is a pivotal year for Intel," he said Thursday.

The CEO, on the job since February, also pledged to make some production capacity available swiftly to help alleviate a broader shortage of chips that has caused disruptions across a range of industries, in particular car production.

The White House this month met with executives from the chip and other industries to help determine what action it should take to address the shortage and strengthen the domestic chip-building industry. President Biden previously pledged to fix the chip shortages and included $50 billion for the semiconductor industry in his expansive infrastructure-spending package.

Intel's sales drop comes despite strong demand for chips broadly. Vivek Arya, a semiconductor analyst at Bank of America, said ahead of Intel's results that the company is being held back by several factors. Among those are that a surge in demand for personal computers is centered largely on lower-end devices like Chromebooks, while Apple Inc. is ditching Intel for in-house chip designs on some of its equipment. And after a strong year of spending on data centers, outlays this year are expected to advance at a slower pace, he said.

Mr. Arya expects Intel's sales growth to trail that of the broader sector, which he projects will increase around 15% this year.

Mr. Gelsinger is trying to rebuild a company that has suffered repeated setbacks in making its most advanced chip and that has lost ground to Asian rivals. Mr. Gelsinger last month said the company was making progress on its newest chips, though analysts have said they want more detail.

Intel also has said it would increase outsourcing of some chip production to keep pace, he said.

The company also is contending with increased competition. Nvidia Corp. -- which last year overtook Intel as American's most valuable chip company -- and Advanced Micro Devices Inc. have taken market share. Nvidia this month also said it would start selling central-processing units for data-centers, a market Intel has long dominated. Intel this month introduced an enhanced data-center chip.

Mr. Gelsigner said despite projecting slower sales growth than its rivals, Intel aims to recapture lost ground. "We are out to gain market share," he said.

Intel had $5.6 sales in the data-center business, missing analysts expectation of $5.9 billion in sales. Profitability of that business was hammered by research and development spending, the company said, and costs associated with ramping up production of a new chip.

Intel's effort to become a contract chip maker also isn't without hurdles. The company has tried to break into that market before, with little success. And its chief rivals, Taiwan Semiconductor Manufacturing Co. and Samsung Electronic Co., are readying their own multibillion-dollar spending plans to expand. TSMC last week raised its capital-expenditure plan for this year to $30 billion while lifting its sales forecast. Samsung has earmarked $116 billion in investment by 2030 to diversify chip production.

Mr. Gelsinger has said Intel is planning additional chip investments. The company could benefit from the bipartisan support in Washington for U.S. chip companies. For instance, Intel is bidding on a Pentagon contract to help fund domestic chip-making to meet government security needs.

Intel said it expects revenue for the current quarter of $18.9 billion.

Write to Paul Ziobro at [e-mail]

(END) Dow Jones Newswires

April 22, 2021 17:27 ET (21:27 GMT)

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