By Asa Fitch 

Intel Corp. trimmed its financial forecast for this year and said quarterly sales of chips for data centers declined for the first time in seven years, reflecting uncertainty in a business-computing market and a slowdown in demand amid the U.S.-China trade battle.

Revenue slid in the three months through March 30 in the semiconductor giant's memory and programmable-chips businesses, too. But demand for Intel chips used in personal computers helped offset that decline, leaving overall first-quarter revenue flat compared with the year earlier at $16.06 billion. Profit in the quarter fell about 11% from the year before to $3.97 billion.

Chief Executive Bob Swan said Intel has become more cautious about the outlook for this year, although it expects market conditions to improve in the second half.

In an interview, Mr. Swan said Intel's data-center business has been hurt by big cloud-computing companies deferring purchases of new chips as they maximize usage of their existing computing power. An economic slowdown in China has further hampered the business.

"We have a dramatic slowdown in China," he said. "It's a big important market for us, and we're seeing buying patterns for both enterprise and cloud players slow dramatically."

Intel said it now expects earnings of $4.14 a share for full-year 2019 on revenue of $69 billion, lower than the $4.35 a share in profit on $71.5 billion in revenue it forecast three months ago.

Intel shares dropped more than 7% in after-hours trading following the results and revised guidance. The stock ended down 1.9% in regular trading at $57.61, though it had still gained nearly 23% for the year through Thursday's close.

The results come as Intel looks to reorient itself financially under Mr. Swan, the former chief financial officer who became permanent CEO in January.

Mr. Swan this month decided to jettison a business of making modem chips for 5G smartphones that analysts say hadn't been performing well. The move came after its main modem-chip customer, Apple Inc., settled a long-running legal dispute with Qualcomm Inc., paving the way for Qualcomm to start supplying chips for iPhones again. Intel still plans to meet commitments to supply modems for iPhones using current-generation cellular technology.

Intel's statement on the 5G modem decision left unclear the precise reason. But in the interview Thursday, Mr. Swan said it was a direct result of the settlement between its customer and its rival.

"In light of the announcement of Apple and Qualcomm, we assessed the prospects for us to make money while delivering this technology for smartphones and concluded at the time that we just didn't see a path," Mr. Swan said.

Leaving the modem business will shave about $2.6 billion off Intel's revenue by the 2021 financial year, according to a UBS estimate. The decision came after the first quarter and the impact didn't show up in Intel's latest results. Despite abandoning its 5G smartphone pursuit, Intel still sees 5G chips for networking equipment and non-smartphone devices as a big opportunity, Mr. Swan said.

Asked whether Intel was looking at selling the 5G smartphone modem business, he said the company is "evaluating alternatives on what's the best course for our IP and our people."

Intel's revenue for the latest quarter was roughly in line with expectations of analysts surveyed by FactSet. Adjusted earnings of 89 cents a share were slightly higher than forecasts of 87 cents a share.

Intel's data-center chip business accounts for about 30% of total revenue. Intel had warned in January that it saw trouble on the horizon for that after its sales grew by 21% last year.

The last time Intel's data-center revenue declined was in the first quarter of 2012, just a few years after Intel started reporting results for the division. Data-center revenue in that quarter was $2.41 billion. In this year's first quarter, it was $4.9 billion, down 6% from a year earlier.

Even though Intel's personal computer-chip business is doing better -- it booked $8.6 billion of revenue in the first quarter in its so-called PC-centric business, up 4% year-on-year -- the company has faced capacity shortages at its factories since last year that have limited chip shipments at a time of unexpectedly high demand.

Mr. Swan said the capacity picture was set to be strained through the first half of the year, but would improve in later quarters.

"We're continuing to make progress and we're expecting to be in balance as we go into the second half of the year," he said.

While Intel's data-center struggles are uncharacteristic for an area that had been a major source of revenue growth, the sluggishness may ease if cloud-computing companies accelerate their investment in data centers later in the year. Encouragingly for Intel, some of the largest cloud-services companies are still seeing healthy growth in their businesses. Microsoft Corp., for example, on Wednesday reported 73% year-on-year growth for its Azure cloud arm in the first three months of the year.

Write to Asa Fitch at asa.fitch@wsj.com

 

(END) Dow Jones Newswires

April 25, 2019 18:05 ET (22:05 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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