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Work-at-Home Economy Helps Intel — WSJ

Earnings rise 51% as lockdown spurs gain in data-center business; guidance for year pulled

By Asa Fitch 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 24, 2020).

Chip maker Intel Corp. reported a jump in first-quarter earnings, buoyed by sales in its data-center business as the work-from-home economy spurs demand for computing power, but it joined many companies in pulling full-year guidance because of business uncertainty.

The Santa Clara, Calif., company, the U.S.'s largest chip maker, reported sales of $19.83 billion for the March quarter, a 23% increase over the same period last year. Earnings per share rose 51% to $1.31.

With the pandemic forcing millions of people to work from home, Intel said its data-center division, already growing before the health crisis, saw sales increase 43%. Providers of data centers, the huge server farms that store data and power the internet, have been accelerating upgrades and adding hardware, including Intel processors, to cope with growing demand.

Intel Chief Financial Officer George Davis said the cloud-computing giants that rent out computing power aren't the only ones showing increased appetite for its data-center chips, but also government and corporate buyers.

"We see some of those dynamics continuing in the second half as well," he said.

Sales in the company's division that includes chips powering personal computers came in ahead of Intel's expectations, rising 14% as consumers bought machines to work remotely.

A sharp jump in sales of memory chips, also used heavily in data centers, boosted the first-quarter figures. While Intel's results topped Wall Street forecasts, its decision to withdraw previously issued full-year guidance signaled it isn't insulated from the uncertainty affecting many companies across the U.S.

The coronavirus slump is already hitting Intel's internet-of-things division, which reported a 3% fall in revenue in the first quarter, and is likely to affect sales of chips to the automotive industry, where car sales are expected to drop this year. PC demand, while strong in the first quarter, may fall off as consumers' buying power sinks in tandem with global economies.

"We're not entirely immune from these sorts of effects," Mr. Davis said.

Intel's stock fell more than 5% in after-hours trading.

The company said it expected gross margins in the current quarter to fall by more than 5 percentage points to 53% -- lower than analysts had forecast -- on increased production of new, high-end processors that come with lower margins.

Intel, like others, faces uncertainty over whether the data-center buying that pushed results higher in the first quarter will be sustained through the rest of the year. Those sales are cyclical even in normal times and could falter later this year if customers decide they don't need extra hardware. Intel is most anxious about a potential waning in demand from companies and governments in the latter part of the year, Chief Executive Bob Swan told analysts.

Another effect of the virus is likely lower capital spending by Intel this year, Mr. Davis said. That spending now is expected to come in below the $17 billion the company projected earlier this year, largely because coronavirus-related shutdowns in some countries where it operates have stalled construction projects.

The impact would be six to eight weeks of spending that will likely be pushed further out, he said, adding the company remains committed to spending on its engineering goals.

Intel is also dealing with stiff competition from rival Advanced Micro Devices Inc. and lingering manufacturing issues that have prevented it from taking full advantage of demand spikes for its personal computer chips. Intel said supply and demand for its processors were strong in the first quarter.

Although the chip-making giant withdrew its full-year guidance, it provided a sales outlook for the current quarter of $18.5 billion that came in above the $17.79 billion analysts surveyed by FactSet were expecting. Like other tech companies, Intel has been juggling a mixture of costs and benefits from the pandemic but has held up well relative to many corporate peers.

Intel's results provide the latest indication of how the virus could hit the bottom lines of high-tech American manufacturers. On Tuesday, Texas Instruments Inc., a diversified semiconductor company that is seen as an industry bellwether, reported better-than-forecast results and said it would keep its factories running at their current levels to be ready for an economic bounce when the pandemic subsides.

Nevertheless, analysts have a dim view of semiconductor sales globally for the full year. Chip revenues will most likely decline by around 10% this year, said Handel Jones, CEO of consulting firm International Business Strategies Inc.

Chip makers are dealing with slowed manufacturing in Asia in the early part of the year, which set back testing and assembly operations. And with consumers paring back spending in response to the economic downturn from the virus, global sales of smartphones and automobiles that had been big markets for the chip industry are looking anemic.

Intel is expected to do better than many other companies, though, given its dominant position in data centers.

Others have enjoyed a similar boost. Micron Technology Inc., a major computer memory maker, last month reported stronger-than-expected earnings as it shifted its production toward chips designed for use in data centers. Inphi Corp., a smaller Santa Clara, Calif.-based supplier of networking hardware to data centers, on Tuesday said it was expecting better sales because of demand accelerated by the pandemic.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

April 24, 2020 02:47 ET (06:47 GMT)

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