Intel margins collapse as customers switch to cheaper chips, stocks fall 10%

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(Reuters) – Intel Corp INTC.O Margins slumped in the last quarter on Thursday, as consumers bought cheaper laptops and businesses hit by a pandemic and governments curtailed data center spending, news that lowered its shares by 10%.

FILE PHOTO: Bob Swan, CEO of Intel Corporation, gives an interview to Reuters outside the Fab 42 microprocessor manufacturing site in Chandler, Arizona, US October 2, 2020. REUTERS / Nathan Frandino / File Photo

Intel, the leading supplier of processor chips for PCs and data centers, has struggled with manufacturing delays. In July, he said his next generation of chip-making technology was six months behind schedule.

Chip sales are booming, but customers want cheaper chips rather than Intel’s more expensive high-performance offerings, reducing overall gross margins.

The pandemic has given Intel a boost in the form or surge in laptop sales as employees and students work and learn from home. Its PC group’s sales totaled $ 9.8 billion, beating analysts’ estimates of $ 9.09 billion, according to FactSet.

But Intel sold a higher volume of less profitable chips in its PC business, slashing operating margins to 36% in the third quarter from 44% a year earlier.

“You are seeing the demand shift from high-end desktop and business PCs to entry-level consumer and educational PCs,” CFO George Davis told Reuters in an interview. “Even if the volume is good, your (average selling prices) are going down, which affects your gross margins a bit.”

Davis said a similar dynamic has hit data center activity, where government and business spending fell 47% after two quarters of growth and operating margins fell 49% to 32%. . Revenue from Intel’s data center business fell 7% to $ 5.9 billion in the reported quarter, from $ 6.21 billion, according to FactSet.

While cloud computing customers and 5G network operators have helped to make up some of the shortfall, these chips are cheaper, Davis said.

“The main issue for Intel heading into 2021 remains the pressure on gross margin and the further deterioration of its leadership position due to delays in the roadmap of its process nodes,” KinNgai Chan, analyst at Summit Insights Group.

Intel faces a challenge from rivals such as Advanced Micro Devices Inc AMD.O and Nvidia Corp. NVDA.O. These competitors are using outside manufacturers and have taken advantage of Intel’s woes to gain market share in data centers and PCs, with AMD in particular achieving its highest market share since 2013 earlier this year.

Intel, however, said a 10-nanometer chip factory in Arizona has reached full production capacity and now plans to ship 10nm product volumes over 30% in 2020 compared to January expectations.

Excluding items, it earned $ 1.11 per share, as estimated, according to IBES data from Refinitiv.

The company said it expected fourth-quarter revenue of around $ 17.4 billion, while analysts expected revenue of $ 17.36 billion.

Earlier this week, Intel said it would sell a money-losing memory chip company to SK Hynix of Korea. 000660.KS in an all-cash, $ 9 billion deal, with Intel hanging on to a more advanced memory chip and using the money to invest in other products.

The company also said it launched a $ 10 billion share buyback program in August.

“Its stock is trading at 10 times earnings and looks cheap,” said Patrick Moorhead, Senior Analyst Moor Insights & Strategy.

(This story has been passed on to add the missing word “down” to paragraph 3)

Reporting by Munsif Vengattil, Ayanti Bera and Stephen Nellis; Editing by Anil D’Silva and David Gregorio

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