Intel Posts 22% Quarterly Sales Decline, Slashes Forecast

(Bloomberg) — Intel Corp., the world’s biggest maker of computer processors, fell far short of analysts’ second-quarter sales and profit estimates and slashed forecasts for the year, weighed down by a drop in demand for data-center chips and a steep decline in PC shipments. Shares tumbled as much as 12% in late trading.

Most Read from Bloomberg

Revenue in the second quarter fell 22% to $15.3 billion, significantly below the average analyst estimate of $18 billion. Per-share profit excluding some items was 29 cents, Intel said Thursday in a statement, while analysts had predicted 69 cents. Sales in the current period will be as low as $15 billion, compared with projections of $18.7 billion.

While investors had anticipated that a PC slump would weigh on Intel’s performance, an unexpected 16% drop in revenue from expensive server chips dragged down overall sales and profit. Prices are falling and customers have ordered from rivals, Intel said.

Chief Executive Officer Pat Gelsinger said the majority of Intel’s shortfall was caused by a slowdown in the economy, but the company’s failure to produce better products on time also contributed to the miss. The current quarter will be the low point for Intel’s performance, Gelsinger said, as its customers that are working through unused stockpiles haven’t been making new orders.

“We haven’t seen this level of inventory correction in ten years,” Gelsinger said in an interview. “We feel very confident that it’s the bottom.”

Intel’s current order levels are lower than end-market consumption of the devices that house Intel’s chips, Gelsinger said. That means orders will have to rebound as soon as inventory has been burned off, he said.

The CEO said he’s not backing off a plan to spend heavily on improving Intel’s manufacturing technology, building new products and getting into new markets to chase future opportunities. The “austerity” of the decline in the economy and Intel’s performance will help the company place its big bets more strategically, while cutting back on areas that aren’t key to its future, he said.

In the meantime, the company expects to record restructuring charges in the current period, Chief Financial Officer Dave Zinsner said on a conference call, saying that details would be disclosed later.

Intel shares slid as low as $35.11 in extended trading, after closing at $39.71 in New York trading. The stock has fallen 23% this year, in line with the drop in the broader Philadelphia Semiconductor Index.

Read more: Gartner Slashes Chip Industry Forecast After PC Demand Slumps

Gelsinger’s push to restore Intel’s manufacturing prowess got a boost this week, when the US Senate and House passed legislation that includes $52 billion in grants and incentives for domestic semiconductor manufacturing. Intel, which has announced new plants in Arizona and Ohio in an attempt to compete directly with Taiwan Semiconductor Manufacturing Co., has told investors that government subsidies will help cushion the impact of the multibillion-dollar investments on its overall financial picture.

In the recent quarter, Intel’s data-center division sales slid to $4.6 billion, compared with the average analyst estimate of $6.04 billion. The company expects its data center business to grow more slowly than the overall server market this year, Gelsinger said.

“It’s not a fact we like,” he said.

Client computing, Intel’s PC-chip unit, saw sales plummet 25% to $7.7 billion, compared with an average projection of $8.76 billion.

While Intel now sells processors that will restore its leadership in personal computer performance, a new server chip design was delayed and a new graphics chip offering didn’t debut as well as the company had hoped, Gelsinger said.

The chips that Intel is introducing now were conceived before he took over, and new products that were begun during his tenure will arrive on time and perform as billed, he promised.

The company’s new target for 2022 revenue is $65 billion to $68 billion, a decline of as much as 13% from the prior year and a cut of as much as $11 billion from what it projected as recently as April. Gross margin will be 49%, 9.1 points narrower than a year earlier and 3 points shy of what the company had targeted.

Earlier this week, market researcher Gartner Inc. slashed its prediction for overall semiconductor sales this year. Gartner also predicts PC shipments will drop 13% in 2022, and chip revenue from that market will shrink 5.4%. Other chipmakers, including Qualcomm Inc., have cited an unsteady economy and tepid consumer spending when giving less optimistic outlooks for earnings this year.

Intel said gross margin, or the percentage of sales left after deducting production costs, will be 47% in the current period. That metric of profitability, once touted as an indication of Intel’s strength, was squeezed by increasing competition and is now more than 10 points narrower than the company’s annual gross margins for much of the past decade.

Gelsinger, who took over as Intel’s top executive in the first quarter of last year, has mapped out a strategy to return the company to its position at the forefront of the semiconductor industry and branch out into new markets. That initiative will massively increase Intel’s spending on manufacturing plants and equipment. Intel’s CEO says that’s now his priority over investor returns in the form of share repurchases.

Shareholders initially welcomed Gelsinger’s aggressive plans to make Intel’s products and manufacturing technology more competitive. More recently, investor concern has escalated about how much it may cost and how long it may take to win back market share lost to Advanced Micro Devices Inc., Nvidia Corp. and TSMC.

(Updates with CEO comments starting in fourth paragraph.)

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.