Intel Tumbles on Data Center Sales Decline, Tepid Forecast

(Bloomberg) — Intel Corp. shares slumped after a surprise drop in data center chip sales and a tepid forecast stoked concern that manufacturing delays are whittling away the company’s lead in semiconductors.

The data center business, a major source of Intel profit, suffered a 10% decline in third-quarter revenue compared with a year earlier after a weak economy hurt sales to large companies and government customers.

Revenue in the current period will be about $17.4 billion, the Santa Clara, California-based company said Thursday in a statement. That was in line with the average analyst prediction, but would mean sales drop 14% from a year ago.

Intel experienced a very different quarter compared with its expectations entering the period, Chief Financial Officer George Davis said. “We saw a big change in our data center demand profile with enterprise and government dropping 47% year over year after being up 30% for two consecutive quarters.”

Average selling prices for Intel’s data center chips dropped 15% from a year earlier, suggesting competition is rising in a lucrative market that the company has dominated for a decade. Rival Advanced Micro Devices Inc. rose 2.4% in extended trading on Thursday.

Intel is in the midst of its worst crisis in at least a decade. The company has been the largest chipmaker for most of the past 30 years by combining the best designs with cutting-edge factories. Most other U.S. chip companies shut or sold plants and tapped other firms to make the components. Intel held out, arguing that doing both improved each side of its operation and created better semiconductors. That strategy is being questioned now.

Read more: Intel ‘Stunning Failure’ Heralds End of Era for U.S. Chip Sector

The results on Thursday put more pressure on Chief Executive Officer Bob Swan to fix the problems. Intel declined about 10% in extended trading after closing at $53.90 in New York. The stock has lost about 10% this year compared with a 28% gain for the Philadelphia Stock Exchange Semiconductor Index.

In July, the CEO announced delays in it 7-nanometer chip-production process. Its predecessor, 10 nanometer, is only now becoming mainstream after being initially promised for 2017. Production techniques play a crucial role in the performance of processors and what it costs to make them. Intel had led the $400-billion chip industry in this area for three decades. Now rivals such as Advanced Micro Devices Inc. can get products made with more advanced techniques by Taiwan Semiconductor Manufacturing Co.

Swan is trying win back investor confidence by selling businesses, replacing some technology leaders and trying to push Intel’s current products into new markets. He’s even suggested the company may outsource some manufacturing to other chipmakers, which would be a radical strategy change and could leave U.S. chip know-how lagging behind other countries.

On Thursday, Davis, the CFO, said Intel had no news to share on the progress of its 7-nanometer technology.

“Our focus is to produce a predictable cadence of leadership products for our customers,” he said. “We will continue to invest in process technology and our road map there, but as we announced on the last call we’re going to be open minded about using process technology that makes most sense for our customers.”

Third-quarter profit, excluding some items, was $1.11 a share and sales came in at $18.3 billion, down 4% from a year earlier. Analysts were looking for $1.10 a share on revenue of $18.2 billion.

(Updates with data center chip average selling prices in fifth paragraph)

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