Intel’s margins tumble as customers shift to cheaper chips, shares slide 10%

In this news, we discuss the Intel’s margins tumble as customers shift to cheaper chips, shares slide 10%.

(Reuters) – Intel Corp INTC.O reported on Thursday that margins fell in the last quarter, as consumers bought cheaper laptops and businesses hit by a pandemic and governments cracked down on data center spending, a news report which lowered its shares by 10%.

Intel, the leading supplier of processor chips for PCs and data centers, has struggled with manufacturing delays. In July, he said his next generation of chip-making technology was six months behind schedule.

Chip sales are booming, but customers want cheaper chips rather than Intel’s pricier high-performance offerings, which is driving down overall gross margins.

The pandemic has given Intel a boost in the form or surge in laptop sales as employees and students work and learn from home. Its PC group’s sales totaled $ 9.8 billion, beating analysts’ estimates of $ 9.09 billion, according to FactSet.

But Intel sold a higher volume of less profitable chips in its PC business, slashing operating margins to 36% in the third quarter from 44% a year earlier.

“You are seeing the demand shift from high-end desktop and business PCs to entry-level consumer and educational PCs,” CFO George Davis told Reuters in an interview. “Even if the volume is good, your (average selling prices) are going down, which has a small impact on your gross margins.”

Davis said a similar dynamic has hit data center activity, where government and business spending fell 47% after two quarters of growth and operating margins fell 49% to 32%. . Revenue from Intel’s data center business fell 7% to $ 5.9 billion in the reported quarter, from $ 6.21 billion, according to FactSet.

While cloud computing customers and 5G network operators have helped offset some of the shortfall, these chips are cheaper, Davis said.

“The main issue for Intel heading into 2021 remains the pressure on gross margin and the further deterioration of its leadership position due to delays in the roadmap of its process node,” KinNgai Chan, analyst at Summit Insights Group.

Intel faces the challenge of rivals such as Advanced Micro Devices Inc AMD.O and Nvidia Corp NVDA.O. These competitors are using outside manufacturers and have capitalized on Intel’s woes to gain market share in data centers and PCs, with AMD in particular achieving its highest market share since 2013 earlier this year.

Intel, however, said a 10-nanometer chip factory in Arizona has reached full production capacity and now plans to ship 10nm product volumes over 30% in 2020 compared to January expectations.

Excluding items, it earned $ 1.11 per share, as estimated, according to IBES data from Refinitiv.

The company said it expected fourth-quarter revenue of around $ 17.4 billion, while analysts expected revenue of $ 17.36 billion.

Earlier this week, Intel said it would sell a money-losing core memory chip company to SK Hynix 000660.KS of Korea in a $ 9 billion cash deal, Intel s ‘hang on to a more advanced memory chip unit and use the money to invest in other products.

The company also said it launched a $ 10 billion share buyback program in August.

“Its stock is trading at 10 times earnings and looks cheap,” said Patrick Moorhead, Senior Analyst Moor Insights & Strategy.

Reporting by Munsif Vengattil, Ayanti Bera and Stephen Nellis; Editing by Anil D’Silva and David Gregorio

Original © Thomson Reuters

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