Company notes delay in development of superfast chips, sending
shares lower
By Asa Fitch
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 24, 2020).
Intel Corp. reported stronger earnings in the second quarter,
buttressed by a work-from-home economy that spurred demand for
computing power, but its shares tumbled in after-hours trading when
it signaled a delay in its development of superfast chips.
Intel said Thursday its profit in the April-June period rose 22%
from a year ago to $5.11 billion. Earnings per share were $1.19,
rising from 92 cents a share last year and exceeding forecasts from
analysts surveyed by FactSet. On an adjusted basis, EPS also rose
to $1.23.
Second-quarter revenue rose more than 19% from a year earlier to
$19.73 billion, coming in ahead of analysts' estimates.
But Intel revealed further delays of its seven-nanometer chip
technology that underlies future generations of central processing
units. The technology, Intel said, is now trending roughly 12
months behind internal targets.
Shares fell more than 10% in after-hours trading.
Santa Clara, Calif.-based Intel was among companies that
withdrew its full-year earnings guidance amid the coronavirus
pandemic, and it also suspended share buybacks and issued debt. But
tech companies -- and the chip industry in particular -- have shown
resilience because their products underpin the tools people are
turning to for remote work, school and staying in touch with
family.
Thursday, Intel gave an outlook for the third quarter and
reinstated its full-year guidance. For the full year Intel said it
expects to generate per-share earnings of $4.53 and $75 billion in
revenue. But the third-quarter earnings guidance was weaker than
Wall Street expected, as well as the implied fourth-quarter
performance.
Despite those healthy sales, Intel's future isn't entirely
secure. The company could lose a chunk of its processor sales --
amounting to roughly 3% of annual revenue, analysts say -- when
Apple Inc. shifts away from Intel chips in its Mac computers to its
own designs starting later this year.
And while Intel has struggled to move into mass production of
its most advanced chips, rival chip maker Advanced Micro Devices
Inc. has been challenging the company's dominance. AMD's market
share in personal computer CPUs climbed above 17% in the first
quarter, more than doubling from five years ago, according to
Mercury Research. Intel holds almost all of the remaining market
share.
Following Intel's earnings release, AMD's shares rose about 7.5%
after hours. AMD is scheduled to release its second-quarter
earnings report July 28.
Intel's struggles with seven-nanometer chips mirror delays in
designing and producing its earlier generation of chips based on a
10-nanometer process, an industry term tied loosely to the size of
transistors that chips use to make calculations. Intel executives
have told investors in the past that once the company conquered its
challenges in 10-nanometer technology, sizing down to seven
nanometers and beyond could happen more quickly.
"The reason the stock has been a relative underperformer in the
last couple years is the whole 10-nanometer thing, but that was
finally starting to show some light," said Stacy Rasgon, an analyst
at Bernstein Research. "And now we have to do it all over
again."
There aren't any "fundamental roadblocks" with the design of
seven-nanometer chips, Chief Executive Bob Swan told analysts on a
conference call, adding that Intel had found the root cause of the
issue and was taking steps to avert further delays. He said Intel
could turn more to external manufacturers, perhaps in combination
with its own factories, to meet customers' needs -- a significant
shift for a company that has mostly relied on its own manufacturing
muscle.
The seven-nanometer delay could harm Intel's competitive
position because Taiwan Semiconductor Manufacturing Co., the
largest contract manufacturer of chips in the world, is expected to
be making processors with even smaller, more efficient transistors
by the time Intel comes out with its chips. AMD and a wide range of
other chip companies that compete with Intel use TSMC in making
their chips -- although Intel could also tap TSMC if it moves to
more external manufacturing.
The first shipments of Intel's seven-nanometer chips are now
expected to take place for PC CPUs in late 2022 or early 2023,
while initial shipments of data-center CPUs are expected in the
first half of 2023, Mr. Swan said.
On top of its technological issues, Intel has been adding
manufacturing capacity to address a shortage of its chips that led
to an unusual apology letter sent to PC-maker customers in
November. Chief Financial Officer George Davis said Thursday the
company was on track to resolve its supply issues in the latter
half of the year.
"We think we're going to be able to supply and claw back share
and end the year with strong share growth in PCs," he said in an
interview.
In the second quarter, Intel said sales in its division that
focuses on data centers -- huge collections of computing power that
drive the internet -- climbed 43%, reaching $7.1 billion.
The second half of the year, though, may not be as rosy for
Intel's data-center business. Many data-center operators snapped up
chips during the pandemic to deal with rising demand. The appetite
from big companies and government customers was already easing, Mr.
Davis said, even though consumer PCs remained strong.
"Some of the work-from-home, learn-from-home dynamics are still
in play, even though at some point, the [gross domestic product]
globally...will catch up, and we're assuming that'll happen in the
second half," Mr. Davis said.
Sales of Intel products for personal computers also rose by 7%
in the latest quarter, reflecting an opportunity in that market
during the pandemic that Intel has seized despite its manufacturing
problems.
During the second quarter, global shipments of desktops,
notebooks and workstations grew 11.2% from the comparable
year-earlier period to 72.3 million units, according to
International Data Corp. figures.
On Tuesday, Texas Instruments Inc., another big chip maker,
reported results that beat Wall Street forecasts and gave a
better-than-expected outlook for the third quarter. Microsoft Corp.
reported r ecord quarterly revenue Wednesday, driven by the
work-from-home trend. Although International Business Machines
Corp.'s quarterly revenue declined, it reported
better-than-expected earnings on Monday.
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
July 24, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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