You've got it down Pat: Intel boss says 2020 was so strong, a 20% drop in data center sales now is to be expected

Server chip business doldrums blamed on 'digestion'

Intel on Thursday reported first-quarter 2021 revenue of $19.7bn, which was better than analysts expected though not enough to prevent Chipzilla's share price slipping, the stock closed down 1.77 per cent and slipped still further in after-hours trading.

Analysts on average had been expecting a mere $17.5bn. That translates to GAAP earnings-per-share of $0.82 and non-GAAP EPS of $1.39, which came in $0.29 higher than company guidance at the start of the year.

Some of the market disappointment may be attributable to Intel's Q2 2021 EPS guidance of $1.05, which is less than the average anticipated figure of $1.09. Profits falling 41 per cent in Q1 on the back of weak data center demand was also not a good look.

Pat Gelsinger, who became Intel's CEO in February, nonetheless hailed the "strong first quarter results," with revenue down one per cent year-over-year, in a statement.

"The response to our new IDM 2.0 strategy has been extraordinary, our product roadmap is gaining momentum, and we’re rapidly progressing our plans with re-invigorated focus on innovation and execution,” he said. "This is a pivotal year for Intel."

IDM 2.0, which stands for Integrated Device Manufacturing, is Intel's description of a strategy laid out by Gelsinger last month that involves creating more modular products that Intel can build either on its own or in conjunction with partners, while the company also gets into the foundry market. Intel has committed $20bn to build its Intel Foundry business in Arizona.

The strategy differs from Intel's past go-it-alone approach in that it acknowledges the possibility that working with third-party foundries may be necessary. Had Intel been able to deliver 7nm designs on time, the chip maker might have been less inclined to reach out for help.

The full results

Intel's report card for the quarter can be summarized as follows:

• Revenue: $19.7bn, -1 per cent year-over-year
• Gross Margin: 55.2 per cent
• R&D and MG&A: $5.0bn
• Operating Margin: 18.8 per cent
• Tax Rate: 14.0 per cent
• Net Income: $3.4bn, down 41 per cent
• Earnings Per Share (GAAP/non-GAAP): $0.82/$1.39

• Client Computing Group: $10.6bn, +8 per cent
• Data Center Group: $5.6bn, -20 per cent

And for Internet of Things:

• IOTG: $914m, +4 per cent
• Mobileye: $377m, +48 per cent

• Non-Volatile Memory Solutions Group: $1.1bn, -17 per cent
• Programmable Solutions Group: $486m, -6 per cent

Intel noted that its GAAP earnings incorporate the cost of a $2.18bn patent claim won in March by VLSI Technology, which Intel is appealing. The chip biz on Wednesday defeated another VLSI claim in a Texas jury trial. A third VLSI patent case is scheduled for June.

Gelsinger, asked during Intel's conference call for investors to explain how much of the 20 per cent DCG decline represented "lingering cloud digestion" – a pause in investment cycles – and whether there's any competitive aspect to the segment's weakness, insisted that the loss was less than the company had anticipated.

"Q1 was a little bit better than we expected for DCG in terms of revenue, and we see it, improving as we go through the year," he said. "We had an extraordinary last year and now customers are almost through the digestion of that and we're starting to see signs that they want to start the next build phase in their cloud."

Gelsinger said the global chip shortage underscores the importance of Intel's IDM 2.0 strategy, though it will take several years to make the investments to balance supply and demand.

We had an extraordinary last year and now customers are almost through the digestion of that and we're starting to see signs that they want to start the next build phase in their cloud

"The unprecedented demand for semiconductors has stressed supply chains across the industry," he said. "We've doubled our internal wafer capacity in the last few years, but the industry is now challenged by a shortage of foundry capacity substrates and components."

Chipzilla's 7nm production, he said, is progressing well, and IDM 2.0, he said, "puts us on a path to restore process performance leadership and build on our industry leading packaging technologies."

Intel, said Gelsinger, has been engaging with automotive component suppliers to help them deal with their semiconductor shortages, but acknowledged that Intel cannot do this alone.

"The investment needed at the scale required is immense, and it will require close industry and government partnership to address this need," he said. "Governments around the world are recognizing the critical nature of semiconductors and the need to increase advanced chip manufacturing capacity and prepare for the future.

Gelsinger said Intel is encouraged by President Biden's recognition of semiconductor manufacturing as a critical component of national infrastructure and by his support for related research and infrastructure investments.

Intel is also preparing to meet higher product demand by hiring product makers: Gelsinger said the company has brought on more than 2,000 engineers so far this year and he expects several thousand more will be hired by the year's end.

"In the next couple of weeks we'll tape in the compute tile for Meteor Lake, our first seven nanometer CPU for 2023," he said. "In the data center, we will follow the strong ramp of Ice Lake with Sapphire Rapids, which is scheduled to reach production around the end of this year, and ramp in the first half of 2022." ®