Intel says margins will recover in second half of 2023, shares rise

By Chavi Mehta, Stephen Nellis and Jane Lanhee Lee

(Reuters) -Chipmaker Intel Corp (NASDAQ:) on Thursday said slumping gross margins will improve in the second half of the year, sending its shares higher although a near-term profit forecast missed Wall Street estimates.

The PC and data center chipmaker estimated second-quarter earnings below Wall Street forecasts despite its greater sales optimism, a sign that the company is still struggling to make money even as there are early signs of a recovery in global chip demand.

But Intel shares rose 5.6% in extended trading after the executives on a conference call estimated that adjusted gross margins will climb above 40% in the second half, having hit historic lows in the first half of the year. A fall of about 30% in first-quarter global PC shipments has made some chip industry experts hopeful that an inventory build-up has cleared out, paving the way for fresh orders.

Intel has also ramped up shipping of its most powerful data center chip 4th Gen Xeon, codenamed Sapphire Rapids, which had been delayed for over a year. That delay had allowed rival Advanced Micro Devices (NASDAQ:) and ARM-based server CPU makers to take market share from the company.

The company forecast a second-quarter revenue range with a midpoint of $12 billion, above analysts’ consensus estimate of $11.75 billion, Refinitiv data showed.

Intel Chief Executive Pat Gelsinger told Reuters in an interview he was “seeing some green shoots, increasing stability in the PC market as inventories have stabilized,” adding that he expected the company to hold its position in the data center business.

“The numbers do suggest Intel has gotten about as bad as it will get, so the next quarters depend heavily on corporate tech purchases,” said Glenn O’Donnell, research director at Forrester. “We believe tech spending will slowly increase.”

Intel, struggling to make money, predicted second-quarter adjusted losses of 4 cents per share, worse than the 1 cent per share profit that analysts had estimated according to Refinitiv data.

Underscoring Intel’s profitability slump in recent years, its first-quarter unadjusted gross margin fell to 34.2%, almost half of its multi-decade high of over 67% in 2010. The company forecast a further drop to an unadjusted gross margin of 33.2% for the second quarter.

“While we understand investors may be disappointed in its 2Q23 gross margin outlook, we are confident that Intel’s gross margin will recover in 2H23 as the burden of factory underutilization and new product start-up cost diminishes,” said Kinngai Chan, analyst at Summit Insights Group.

CHINA MEETINGS

Gelsinger said he discussed Intel’s $5.4 billion effort to acquire Tower Semiconductor (NASDAQ:) with Chinese government officials on a recent visit to Beijing. Intel is still waiting on regulatory approval in China to close the deal.

“It was a topic of discussion for many meetings that I had there,” Gelsinger said. “We don’t have a clear view of when that might occur, but we continue to work hard to reach approval of the acquisition.”

He added that the China market, one of the biggest for Intel, felt like it was picking up momentum and that there was “strong support and enthusiasm” from customers. While geo-political risks remain, he said “the business community is a bridge between U.S. and China that we think is a positive one”.

Since China lifted its COVID pandemic measures, U.S. CEOs of big tech companies have been visiting the country.

First-quarter revenue of $11.72 billion slightly exceeded estimates of $11.04 billion. Intel said adjusted losses were 4 cents per share, above analysts’ expectations of a 15 cent per share adjusted loss.