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

[October 23, 2020] By Stephen Nellis

(Reuters) - Intel Corp <INTC.O> on Thursday reported that margins tumbled in the latest quarter as consumers bought cheaper laptops and pandemic-stricken businesses and governments clamped down on data center spending, news that sent its shares down 10%.

Intel, the dominant provider of processor chips for PCs and data centers, has struggled with manufacturing delays. In July, it said its next generation of chipmaking technology was six months behind schedule.

Chip sales are booming, but customers want lower-priced chips rather than Intel's pricier high-performance offerings, dragging down overall gross margins.

The pandemic has given Intel a boost in the form or surging laptop sales as employees and students work and learn from home. Sales in its PC group were $9.8 billion, beating analyst estimates $9.09 billion, according to FactSet.

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

"You're seeing the demand shift from desktops and higher-end enterprise PCs to the entry-level consumer and education PCs," Chief Financial Officer George Davis told Reuters in an interview. "Even though the volume is good, your (average selling prices) are coming down, so that impacts your gross margins a little bit."

Davis said a similar dynamic hit the data center business, where spending by government and business customers plummeted 47% after two quarters of growth and operating margins dropped from 49% to 32%. Revenue from Intel's data-center business fell 7% to $5.9 billion in the reported quarter versus analyst of $6.21 billion, according to FactSet.

While cloud computing customers and operators of 5G networks helped make up for some of the shortfall, those chips are lower priced, Davis said.

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Intel Corporation CEO Bob Swan gives an interview to Reuters outside the Fab 42 microprocessor manufacturing site in Chandler, Arizona, U.S., October 2, 2020. REUTERS/Nathan Frandino/File Photo

"The main issue for Intel moving into 2021 remains gross margin pressure and further deterioration of its leadership position due to its process node roadmap delays," KinNgai Chan, analyst with Summit Insights Group.

Intel faces a challenge from rivals such as Advanced Micro Devices Inc <AMD.O> and Nvidia Corp <NVDA.O>. Those competitors use outside manufacturers and have capitalized on Intel's woes to gain market share in both data centers and PCs, with AMD in particular hitting its highest market share since 2013 earlier this year.

Intel, however, said a 10-nanometer chip factory in Arizona had reached full production capacity and that it now expects to ship 30% higher 10nm product volumes in 2020 compared to January expectations.

Excluding items, it earned $1.11 per share, in line with estimates, according to IBES data from Refinitiv.

The company said it was expecting fourth-quarter revenue of about $17.4 billion, while analysts were expecting revenue of $17.36 billion.

Earlier this week, Intel said it would sell a money-losing commodity memory chip business to Korea's SK Hynix <000660.KS> in a $9 billion all cash deal, with Intel hanging on to a more advanced memory chip unit and using the cash to invest in other products.

The company also said it started a $10 billion share repurchase program in August.

"Its stock is trading at 10 times earnings and looks cheap," said Patrick Moorhead, principal analyst Moor Insights & Strategy.

(This story has been refiled to add missing word 'down' in paragraph 3)

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

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