Intel Gives Weak Profit Forecast as CEO Invests in Factories

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(Bloomberg) — Intel Corp. gave a disappointing forecast for profit in the current quarter, fueling concern that the cost of Chief Executive Officer Pat Gelsinger’s turnaround plan will weigh heavily on the chipmaker’s financial performance.

Excluding some items, earnings will be 80 cents a share in the first quarter, Intel said in a statement Wednesday. Analysts projected 86 cents a share on average. Revenue will be about $18.3 billion, compared with an average estimate of $17.7 billion.

Though demand for server chips is helping bolster sales, the forecast adds evidence that profit is suffering from an Intel spending spree. Gelsinger, who took the helm last year, has embarked on an ambitious plan to overhaul Intel’s manufacturing. That includes a new factory hub in Ohio announced last week that could cost $20 billion. The hope is to restore Intel’s technological edge and head off a growing challenge from Asian rivals.

Shares of the Santa Clara, California-based company fell 1.8% in extended trading following the release of the forecast. Before the report, Intel shares had been outperforming those of its chip peers this year.

Intel was one of only two stocks on the Philadelphia Stock Exchange Semiconductor Index to post gains in 2022, along with the American depositary receipts of Taiwan Semiconductor Manufacturing Co.

Intel’s leader has only been in place a year — meaning he’s still dealing with products and strategy shaped by his predecessors — but investors want to see evidence that his initiatives will help reverse market-share losses and slowing sales. Gelsinger, 60, has argued that products launched in January have already restored Intel’s edge over rival Advanced Micro Devices Inc. But analysts are still projecting that his company’s revenue will be flat in 2022, while AMD’s sales will grow 20%.

Gelsinger has made it clear that the company is in “investment mode,” rather than prioritizing short-term financial metrics. Its gross margin, the percentage of revenue remaining after deducting costs of production, will be 51% to 53% in the next two years — before it begins to rise to the company’s more traditional 60%-to-65% range, Intel has said. Capital expenses will be as much as $28 billion this year, while revenue will be at least $74 billion, Intel said three months ago.

Fourth-quarter sales rose 2.6% to $20.5 billion, beating estimates, fueled by demand for data-center chips. But Intel’s gross margin narrowed from last year, coming in at 55.4%, excluding some items. Analysts estimated 53.6%. Earnings were $1.09 a share, topping the estimate of 90 cents.

Intel’s margins have typically shrunk to these levels in the past only when it’s faced heightened levels of competition and been forced to price aggressively.

Another troubling sign: The company’s biggest data-center customers are pulling back. Even with Intel’s overall data-center processors sales growing, the top buyers of such chips — a group that includes Amazon.com Inc.’s AWS and Microsoft Corp. — shrank 5% in the quarter.

Companies like Amazon and Microsoft have been developing their own chips, aiming to decrease their reliance on outside suppliers. Intel, only a few short years ago, had more than 99% market share in server chips.

In Intel’s client business, which supplies processors to PC makers, revenue was down by about $800 million in the fourth quarter. Notebook sales decreased 16%, while the desktop segment grew 19%.

Intel blamed some of the shortfall in notebooks on “ecosystem constraints” — in other words, manufacturers can’t get enough other parts so they’re ordering fewer processors. As the pandemic winds down, there are concerns that the overall PC market will drop back down to previous levels. The work-from-home push had fueled demand for computers and other technology.

On a more positive note for Intel, it continues to do well in the relatively new area of communications. Phone and internet service providers are increasingly using its computer chips instead of more specialized gear in their networking. Revenue was up 22% in the quarter.

©2022 Bloomberg L.P.