By Asa Fitch 

Intel Corp.'s incoming Chief Executive Pat Gelsinger said the semiconductor giant would outsource more chip production as it posted pandemic-fueled full-year results that also underscore the breadth of challenges the new CEO will face.

Mr. Gelsinger on Thursday said Intel would have other chip companies make more of its products, even if the bulk of its new chips in coming few years would be made in house. The shift marks a break from Intel's traditional reliance on its own factories to make its most-advanced chips -- effectively an acknowledgment that it has fallen behind chip-making rivals.

The report for 2020 caps a challenging yet lucrative year for the semiconductor giant that saw it surpassed in market valuation by rival Nvidia Corp., dropped by Apple Inc. as a supplier for Mac chips, suffer market-share losses and face a push by activist investor Third Point LLC for strategic changes.

The pandemic has helped Intel paper over some of its challenges. PC demand hasn't been this hot in years

Intel posted record annual sales of $77.9 billion, up from $72 billion in 2019 and ahead of the $75.4 billion Wall Street expected. While Intel has benefited from booming demand for PCs in the work-from-home economy, much of the added buying involved lower-cost laptops that aren't as profitable. And growing competition is weighing on its bottom line. Net income for 2020 came in at $20.9 billion, down from $21.1 billion a year earlier.

Intel shares rose more than 6% late Thursday after the company also boosted its cash dividend -- though they subsequently gave up some of those gains.

Departing CEO Bob Swan said, "Intel is in a strong strategic and financial position as we make this leadership transition and take Intel to the next level."

Intel's complete longer-term strategy around the outsourcing of chip production is in flux ahead of the arrival of Mr. Gelsinger. Mr. Swan said last year that a decision was forthcoming by early this year on whether to have the company's advanced chips made by a third party after Intel fell behind Asian rivals in the development of the next generation of superfast semiconductors. On Thursday's call, Mr. Swan said a decision on whether to outsource production of Intel's latest central processing unit would await Mr. Gelsinger formally joining.

The company is considering outsourcing production of some of its most prized chips to those Asian rivals, and particularly to Taiwan Semiconductor Manufacturing Co., the largest and most advanced contract chip maker in the world, according to people familiar with the matter.

Intel already has decided to send out production of coming graphics-processing chips to TSMC, and the companies have been in talks about deepening their relationship further. Mr. Swan visited TSMC to discuss potential options in December, according to a person familiar with the trip.

TSMC last year announced plans to build a chip factory in Arizona, its second in the U.S. And the company last week said it planned record capital expenditures of as much as $28 billion this year, a huge increase from last year and an indication, in some analysts' eyes, that new business from Intel is on the way.

The selection of Mr. Gelsinger, the chief executive of VMware Inc., who spent three decades at Intel earlier in his career, was widely hailed. Intel's stock is up 10% since his naming last week. But analysts expect the turnaround in an industry where product-development cycles are measured in years, not months, to take time.

"It's a good thing to bring in someone new, and particularly someone who has worked at Intel and has a tech background, but whatever path they follow, it will take time to implement," Wedbush Securities analyst Matthew Bryson said ahead of earnings.

Mr. Gelsinger said he was pleased with the progress he had seen as Intel tries to recover from production setbacks on its latest chips.

Third Point, the activist hedge fund led by Daniel Loeb, took a position of about $1 billion in Intel's shares and advocated in a December letter for the company to consider an even more foundational change: splitting up its chip-design and manufacturing operations. Such a move would end Intel's decadeslong run as the leading U.S. integrated chip manufacturer. On Twitter, Mr. Loeb praised Mr. Swan for stepping aside for Mr. Gelsinger.

Intel is facing other pressures, including from competitors such as Nvidia and Advanced Micro Devices Inc. Amid Intel's manufacturing setbacks, AMD has gained market share quickly in central processors for PCs and servers.

Intel said its fourth-quarter sales, while down 1% from a year earlier, topped its expectations on strong demand for laptops and chips used in data centers. Its Mobileye unit, which makes technology for autonomous vehicles, also logged a jump in sales.

Sales for the company's data-center business fell 16% from a year earlier, but the result was matched against one of the strongest periods in the unit's history, Intel finance chief George Davis said. The company, he added, had boosted manufacturing capacity to resolve a shortage of PC chips that had contributed to market-share losses.

Intel said it expects sales in the first quarter of $18.6 billion, down from the year prior but ahead of the $16.1 billion analysts foresaw. The company said it would provide its full-year outlook by the time it posts its first-quarter results in April.

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

 

(END) Dow Jones Newswires

January 21, 2021 18:15 ET (23:15 GMT)

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