By Chavi Mehta, Stephen Nellis and Jane Lanhee Lee
(Reuters) – Chipmaker Intel Corp on Thursday said slumping gross margins will improve in the second half of the year, a welcome sign in a difficult economy that sent shares up 4% in after-hours trading.
Intel also said it was shipping a long-delayed chip in volume, and Chief Executive Pat Gelsinger told Reuters he saw signs of stability in the market for PCs, on which Intel built its reputation.
Gelsinger said he was “seeing some green shoots, increasing stability in the PC market as inventories have stabilized,” and he expected the company to hold its position in the data center business.
During a conference call with investors, the company projected that adjusted gross margins will climb above 40% in the second half, having hit historic lows in the first half of the year. That was enough to overcome concerns about current profitability. A fall of about 30% in first-quarter global PC shipments has made some chip industry experts hopeful that an inventory build-up has cleared out, paving the way for fresh orders.
“The numbers do suggest Intel has gotten about as bad as it will get, so the next quarters depend heavily on corporate tech purchases,” said Glenn O’Donnell, research director at Forrester. “We believe tech spending will slowly increase.”
Intel has also ramped up shipping of its most powerful data center chip, codenamed Sapphire Rapids, which had been delayed for over a year. That delay had allowed rival Advanced Micro Devices and ARM-based server CPU makers such as Ampere Computing to take market share from the company.
The company forecast a second-quarter revenue range with a midpoint of $12 billion, above analysts’ consensus estimate of $11.75 billion, Refinitiv data showed.
Intel, struggling to make money, predicted second-quarter adjusted losses of 4 cents per share, worse than the 1 cent per share profit that analysts had estimated according to Refinitiv data.
Underscoring Intel’s profitability slump in recent years, its first-quarter unadjusted gross margin fell to 34.2%, almost half of its multi-decade high of over 67% in 2010. The company forecast a further drop to an unadjusted gross margin of 33.2% for the second quarter.
“While we understand investors may be disappointed in its 2Q23 gross margin outlook, we are confident that Intel’s gross margin will recover in 2H23 as the burden of factory underutilization and new product start-up cost diminishes,” said Kinngai Chan, analyst at Summit Insights Group.
Gelsinger said he discussed Intel’s $5.4 billion effort to acquire Tower Semiconductor with Chinese government officials on a recent visit to Beijing. Intel is still waiting on regulatory approval in China to close the deal.
“It was a topic of discussion for many meetings that I had there,” Gelsinger said. “We don’t have a clear view of when that might occur, but we continue to work hard to reach approval of the acquisition.”
He added that the China market, one of the biggest for Intel, felt like it was picking up momentum and that there was “strong support and enthusiasm” from customers. While geo-political risks remain, he said “the business community is a bridge between U.S. and China that we think is a positive one”.
Since China lifted its COVID pandemic measures, U.S. CEOs of big tech companies have been visiting the country.
First-quarter revenue of $11.72 billion slightly exceeded estimates of $11.04 billion. Intel said adjusted losses were 4 cents per share, above analysts’ expectations of a 15 cent per share adjusted loss.