Intel's Cloud Thickens -- Heard on the Street

By Dan Gallagher 

Intel Corp. hardly needed more trouble, but trouble has had a way of finding the chip-making giant lately.

The company's third-quarter results Thursday seriously disappointed investors. The main culprits were tepid sales and a very weak forecast for the key data-center segment, pushing Intel's shares down by nearly 10% after hours. This followed a sharp plunge by the stock after its last report three months ago, when management disclosed another delay in its next-generation manufacturing process.

Back then, Intel's current business still was going very well with data-center revenue up 43% from a year earlier to a near-record $7.1 billion for the second quarter. But sales of servers using those processors have plunged, and cloud-computing giants who buy Intel's chips directly also cooled their spending recently. The company said in its conference call Thursday that sales to cloud service operators only rose by 15% in the third quarter compared with a 47% surge in the second quarter. Cloud-related sales are expected to moderate even more in the fourth quarter as customers enter a "digestion period," Intel Chief Financial Officer George Davis said on the call.

All this contributes to the 25% drop Intel projected for its fourth-quarter "data-centric" revenue that also includes its memory, Internet of Things and programmable chip segments. Meanwhile, a recent boom in PC sales isn't helping the company much as Chromebooks and other budget machines that don't command high prices have gained share. Intel still expects to eke out 5% total revenue growth this year. But with smaller data-center focused rivals Advanced Micro Devices and Nvidia expected to put up full-year revenue gains of 32% and 44%, respectively, Intel's middling performance doesn't hold the same appeal.

Intel has seen dips in data-center sales before, and they tend to be short lived. The company's problem this time around is that its recent manufacturing stumble has caused it to consider an unorthodox move of farming out some production to Taiwan's TSMC -- Intel's biggest rival in chip manufacturing. That introduces several unknowns into the company's business model, and those answers won't be clear for some time. Chief Executive Bob Swan said Thursday he would be looking to make a decision on the outsourcing question by the end of this year or early next year. But that would be for products not expected to ship until 2023 -- a long time to keep investors guessing on where exactly they should put their chips.

Write to Dan Gallagher at [e-mail]

(END) Dow Jones Newswires

October 23, 2020 06:44 ET (10:44 GMT)

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