Intel Data Center Results, Margin Outlook Disappoints and the Company’s Shares Drop

(Reuters) – Intel Corp’s fast-growing data center business missed Wall Street targets on Thursday as the world’s second-largest chipmaker faced stiff rivalry from Advanced Micro Devices Inc, and it again delayed the release of its next-generation chips until the end of 2019.

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The company’s shares fell almost 5 percent in extended trading.

Sales to data centers that power mobile and web apps, which bring more profit than chips for personal computers, rose 26.9 percent to $5.55 billion in the second quarter ended June 30. Analysts had expected revenue of $5.63 billion, according to financial and data analytics firm FactSet.

Intel has been increasingly catering to data centers as revenue from PCs has flattened since shipments peaked in 2011.

“We believe performance within Intel’s data center business largely dictates the performance in the shares and view the slight miss versus consensus as a negative,” said CFRA Research analyst Angelo Zino.

AMD, which has been gaining ground with its new server chips, beat estimates for quarterly profit and revenue on Wednesday, powered by its EPYC server processors.

On a conference call with investors, Intel Interim Chief Executive Bob Swan said the firm expected PCs with its next-generation 10nm chips to be in stores during the 2019 holiday season. Murthy Renduchintala, Intel’s chip architecture chief, said on the call that 10nm data center chips will be released “shortly after” the consumer PC chips.

Last quarter, the company said the 10nm chips were being pushed from 2018 to 2019 but did not specify when. Intel originally predicted the chips could be ready by 2015.

The compares to rival Taiwan Semiconductor Manufacturing Co Ltd expecting 7nm chips to contribute more than 20 percent to its revenue next year.

But costs of the 10nm chips are also expected to put pressure on margins, company executives said. Another challenge to margin growth is an expected increase in sales of Intel’s less-profitable modems that help mobile phones connect to wireless data networks.

Earlier this week, Qualcomm Inc executives said they believed Apple Inc had selected Intel to be the sole supplier of modem chips in the next generation of iPhones. Apple and Intel did not comment on Qualcomm’s claim.

Several analysts on Intel’s earnings call expressed concern that its gross margin growth might slow in the fourth quarter, when Apple ships most of its iPhones. Intel executives did not mention Apple or the iPhone but acknowledged those chips are not as profitable as some of its others.

“We expect modem profitability to improve. We don’t see it at the 60-plus percent gross margin level, but we do expect it to be a contributor to earnings performance as we go forward,” Swan said.

Intel’s net income rose to $5.01 billion, or $1.05 per share, from $2.81 billion, or 58 cents per share, in the year-ago quarter. https://bit.ly/2mLLApb

Excluding items, the company earned $1.04 per share, beating expectations of 96 cents per share, according to Thomson Reuters I/B/E/S.

The company benefited from a stabilizing PC market, in which worldwide shipments grew for the first time in six years, according to research firm Gartner.

Revenue in Intel’s client computing business, which caters to PC makers and is still the biggest contributor to sales, rose 6.3 percent to $8.73 billion, beating FactSet estimates of $8.48 billion.

Intel forecast current-quarter revenue of $18.1 billion, plus or minus $500 million, and adjusted earnings of $1.15 per share, plus or minus 5 cents. Analysts on average had expected revenue of $17.60 billion on a profit of $1.08 per share, according to Thomson Reuters I/B/E/S.

Net revenue rose 14.9 percent to $16.96 billion, above estimates of $16.77 billion.

The company is searching for a new chief executive after Brian Krzanich was ousted last month following an investigation that found he had a consensual relationship with an employee in breach of company policy.

Chief Financial Officer Robert Swan is acting as interim CEO.

Shares of the Santa Clara, California-based chipmaker which have gained 13 percent so far this year, fell 4.6 percent to $49.75 after the bell.

(Reporting by Sonam Rai in Bengaluru and Stephen Nellis in San Francisco; Editing by Anil D’Silva and Richard Chang)