Intel Falls as Outlook Shows Costly Path to Regain Dominance

(Bloomberg) -- Intel Corp. Chief Executive Officer Pat Gelsinger spelled out the cost of his drive to return the world’s largest chipmaker to leadership of the industry and investors weren’t pleased. Shares were down 10% in premarket trading.

Executives said profitability will suffer during the next few years because of increased spending on the company’s manufacturing technology. Near term, if Intel’s fourth quarter comes in as the chipmaker projects, sales will decline 3% from a year earlier, gross margin will drop 6.5 percentage points and earnings per share will fall about 40%.

Investors are focused on whether Gelsinger can improve Intel’s products quickly enough to halt market share losses to rivals and defections by customers who are beginning to design their own components. Intel’s outlook adds to concern that his efforts to make the chipmaker’s products and manufacturing more competitive will suppress its earnings. 

Read: Intel Slumps as Spending Plan Spurs Analyst Downgrades: Street Wrap

“Near term, we could have chosen a more conservative route with modestly better financials,” Gelsinger said on a conference call after the results. But “this is why I came back to the company, choosing to invest to maximize the long range business that we have.”

When Gelsinger returned to Intel in February to take on its top job, he inherited a company that had lost its footing in the crucial area of manufacturing, which had been the keystone of its dominance of the industry for more than two decades. The CEO has pledged to improve quality and build factories that will be the basis of a new business offering outsourced production to other companies, even competitors.

Chief Financial Officer George Davis said on a conference call that the spending would continue. Gross margin, or the percentage of revenue remaining after deducting the cost of productions, will be 51% to 53% in the next two years before it begins to rise to the company’s more traditional 60% to 65% range, he said. Intel’s capital expenses will be as much as $28 billion next year while 2022 revenue will be at least $74 billion, Davis said.

Intel’s stumbles and advances by Taiwan Semiconductor Manufacturing Co. have let others boast that they have processors that perform better than Intel’s, something that wasn’t possible during most of Gelsinger’s first tenure with the company. The 60-year-old originally joined the chipmaker as a teenager before leaving in 2009.

Third-quarter net income was $6.82 billion, or $1.67 a share, on revenue of $19.2 billion, Intel said Thursday in a statement. Gross margin was 56%, compared with an average estimate of 55%. Sales, excluding a memory chip business that Intel is spinning off, were $18.1 billion, falling short of estimates. 

In the crucial data center business, revenue from cloud service providers dropped 20% in the quarter ended Sept. 25. Clients such as Amazon.com Inc. and Microsoft Corp. are making more chips for themselves, raising worries that Intel could permanently lose some of that business. Total data center sales of $6.5 billion in the period matched estimates, helped by demand from government and corporations.

Shares of the Santa Clara, California-based company declined to a low of $50.75 in extended trading following the results. The stock closed at $56 in New York and has increased 12% in 2021, lagging behind an index of semiconductor-related shares. 

Revenue in the quarter ending in December will be about $18.3 billion, in line with analysts’ average estimate. Earnings, excluding some items, will be 90 cents a share. Analysts, on average, projected $1.02 a share. Gross margin, the percentage of sales remaining after deducting the cost of production, will be 53.5%.  

Separately, Intel announced that Davis will retire in May 2022. The CFO is a holdover from Gelsinger’s predecessor and one of the relatively few top executives the CEO hasn’t replaced.