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Intel says costly 10nm ramp will counter PC slowdown

China lockdowns, Apple's homegrown silicon, and more give x86 giant a headache – with an aspirin in reach

Analysis Intel promises that a costly ramp in production of 10nm processors, which includes the forthcoming Sapphire Rapids server chips, will pay off in the second half of the year to counter a slowdown in the PC business.

In the x86 titan's first-quarter earnings call Thursday [PDF], the semiconductor maker stuck with its previous forecast for full-year revenue of $76 billion, even though sales for its biggest moneymaker, the Client Computing Group, are slower than expected in the first half of the year.

The PC business unit saw revenue dip 13 percent year-over-year to $9.3 billion in the first quarter, and that trend is expected to continue in the second quarter, CFO David Zinsner warned on the call. On the other hand, Intel's other business units, including the Datacenter and AI Group and Network and Edge Group, all grew in the first quarter.

Zinsner cited multiple factors that are dragging sales of Intel's PC parts, including Apple's continued move away from Intel's Core silicon. He said there is also lower demand for PCs in the consumer and education markets, which is offsetting growth in the commercial world. Intel is experiencing the impact of no longer selling parts to customers in Russia and Belarus too.

What is creating greater uncertainty for Intel is the recent COVID-19 lockdowns in Shanghai, which Zinsner said is creating new supply and inflation issues that are weighing down the overall PC market. The result is that PC makers are keeping inventory levels low, which means less demand for Intel's parts.

"For the lockdowns in Shanghai, we are estimating the impact to be relatively contained under the assumption that these restrictions are nearing an end," Zinsner said.

"Even under a short lockdown, we anticipate it will take some time for the supply chain to normalize, and if the lockdowns persist or spread beyond Shanghai, we could see more material impacts to our outlook," he added.

Intel hopes to fulfill sales goals with variety of chips

To help it reach its $76 billion goal for the year, Intel is hoping a new batch of 10nm processors, including its Sapphire Rapids server chips, will offset the PC slowdown. This also includes Raptor Lake, a new generation of client processors that will land in the second half of the year, when users are more likely to buy new PCs or make upgrades.

"We're going into a much stronger product line with Alder Lake and Raptor Lake and the reversal of inventories for Raptor Lake and Sapphire Rapids starting to hit there as well, which will be very nice to improve both gross margins as well as the revenue outlook," Intel CEO Pat Gelsinger said.

For Sapphire Rapids, Intel is hoping to ramp up the server CPUs "meaningfully faster" than the company's current Xeon Scalable chips, known as Ice Lake, because it expects heavy uptake from server makers and so-called hyperscalers, according to Gelsinger.   

"Every hyperscaler, every OEM has many SKUs lined up for this. This product will be extremely well respected, accepted and broadly deployed in the marketplace this year," he said.

Intel is hoping growth in its Network and Edge Group, which includes IoT products, will offset PC slowness too.

Gelsinger also pointed to growth potential with the company's expanding lineup of discrete GPUs, which includes the new Intel Arc chips for PCs. The chipmaker's GPU and accelerator plans also include the upcoming Ponte Vecchio and Arctic Sound products for servers, plus its Blockscale ASIC for cryptocurrency mining.

The GPUs and accelerators are expected to bring revenue for the company's new Accelerated Computing Systems and Graphics Group to more than $1 billion at the end of the year.

"All of these give us confidence in the second half," Gelsinger said.

10nm ramp is coming at a cost — for now

While Intel is hoping to fuel a good chunk of its 2022 growth with its 10nm process, the ramp up of such products weighed down on its operating profits for both the Client Computing Group and the Datacenter and AI Group in the first quarter. The former's was down 34 percent year-over-year while the other group saw operating profits decline by 1 percent.

On the flip side, Intel said its gross margin in the first quarter was 53 percent and exceeded its guidance by 100 basis points thanks to improved manufacturing yields and lower factory costs.

But with Intel planning to flood the market with more 10nm CPUs, the chipmaker anticipates that its gross margin will dip to 51 percent in the second quarter due to a buildup of pre-qualification reserves.

"We are going to see a little bit of pressure on 10nm in the second quarter. That's part of the reason we're seeing margins down to the low end of our stated range of 51 percent," said Zinsner.  

However, Zinsner promised that Intel's gross margin will rebound to 52 percent in the second half of the year as the company releases more 10nm products for the masses. "We do expect 10nm to become a tailwind for us as costs improve through the back half of the year," he said.

It's all part of the plan, Gelsinger says

The production ramp is part of Intel's expensive comeback plan to introduce five new nodes in four years, with the goal of surpassing foundry rivals TSMC and Samsung by 2025. This, in turn, will help the company make products that are more competitive with the likes of AMD, Nvidia and others that are using alternative architectures such as Arm and RISC-V.

But while Intel recently reported that its plan is coming together quicker than anticipated, the plan is coming at a massive cost that is expected to weigh down on gross margins for the next few years.

Intel shareholders didn't respond well when the company spelled out the costs of the plan in February, and now they're concerned, in light of Intel's first-quarter financial results, about the company's ability to execute amid several challenges. These concerns were reflected in Intel's stock price, which was down more than 5 percent Friday.

To Gelsinger, though, these are important steps Intel needs to take to return to the top after facing years of setbacks due to manufacturing issues.

"We're fired up, and we believe that this is the greatest turnaround story in history," he said in closing Thursday's call. ®

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