By Therese Poletti
Intel Corp.’s new chief executive, Pat Gelsinger, has another urgent problem to deal with, in addition to restoring the chip giant’s manufacturing business to its former glory.
In its earning report Thursday, Intel (NAS:INTC) said its highly profitable business of selling chips to data-center customers had its worst quarter in a year, with revenue dropping an unexpected 20% , which included a 14% drop in average selling prices. Overall, the company’s total revenue of $19.7 billion came in better than expected, even while it was down 1% year over year.
But the surprise double-digit drop in data-center sales unsettled investors, and Intel shares slipped more than 2% in after-hours trading, at one point falling to $60.61 in the extended session.
The state of the data-center business was the dominant topic on the earnings call Thursday afternoon, during which some analysts tried to glean if competitive pressure from rival Advanced Micro Devices Inc. (NAS:AMD) was having an effect.
Intel executives tried to bat away that notion, saying that over half of the drop in average selling prices was due to strong sales of lower-priced network system-on-a-chip products and other product-mix issues. In addition, Intel was seeing a very tough comparison to the first quarter of 2020, when revenue soared 23% overall and data-center revenue surged 34%. They also said many customers were digesting past purchases.
But it is that area that was left mostly undiscussed, with analysts suspecting the sizeable drop in average selling price may be due to competition from AMD. Intel cited higher startup expenses for its newest manufacturing nodes, as it moves to 10-nanometer geometries its next generation.
“Can you help us understand why you’re comfortable that this is digestion and not something more, like cloud guys going to more internal solutions or solutions away from Intel?” asked John Pitzer, a Credit Suisse analyst. “I know you have another hard compare year-over-year on Q2, but what gives you confidence that this is digestion and not something more?”
Gelsinger noted that the company works very closely with its customers and the supply chain, and is building its forecasts based on data from these relationships.
“We know what their inventory levels are. These are very intimate relationships,” Gelsinger said. “So I’d just say at that level, we’re confident when we speak that what they’re doing, and what we’re going to see in the future, and how they’re digesting and deploying the products that we delivered to them last year, are now ramping in.”
Even so, not everyone is buying it. Patrick Moorhead, an analyst with Moor Insights, said in a brief note that he attributed the lower prices in the data-center group “to a combination to mix shift lower and competitive pressure. “
With data center as such a big profit driver for Intel, investors are hoping that Gelsinger is right and that after a brief digestion period, those sales will come back. Next Tuesday, when AMD reports its earnings, should provide another data point. But it may be that Gelsinger not only has a manufacturing issue to work on and build up again, but an increasingly stronger opponent in AMD.