Analysis Intel promises that a costly ramp-up of 10nm processor production, which includes upcoming Sapphire Rapids server chips, will pay off in the second half to counter a slowdown in PC business.
In titan x86’s first quarter earnings call on Thursday [PDF]the semiconductor maker stuck to its previous forecast for annual revenue of $76 billion, even as sales of its biggest moneymaker, the Client Computing Group, are slower than expected in the first semester.
The PC business unit saw revenue fall 13% year-over-year to $9.3 billion in the first quarter, and that trend is expected to continue in the second quarter, Chief Financial Officer David Zinsner warned during of the call. On the other hand, Intel’s other business units, including Datacenter & AI Group and Network & Edge Group, all grew in the first quarter.
Zinsner cited several factors holding back Intel’s PC parts sales, including Apple’s continued move away from Intel’s Core silicon. He said PC demand was also weaker in the consumer and education markets, offsetting growth in the commercial world. Intel is also feeling the impact of no longer selling parts to customers in Russia and Belarus.
What creates greater uncertainty for Intel are the recent COVID-19 lockdowns in Shanghai, which Zinsner says are creating new supply and inflation issues that are weighing on the entire PC market. The result is PC makers keeping inventory levels low, which means less demand for Intel parts.
“For the Shanghai shutdowns, we estimate the impact to be relatively contained assuming these restrictions come to an end,” Zinsner said.
“Even under a short lockdown, we expect it will take some time for the supply chain to normalize, and if lockdowns persist or extend beyond Shanghai, we could see impacts most important to our prospects,” he added.
Intel hopes to hit sales targets with a variety of chips
To help it reach its $76 billion goal for the year, Intel hopes a new batch of 10nm processors, including its Sapphire Rapids server chips, will make up for the PC slowdown. It also includes Raptor Lake, a new generation of client processors that will land in the second half, when users are more likely to buy new PCs or upgrade.
“We’re getting into a much stronger product lineup with Alder Lake and Raptor Lake and the inventory reversal for Raptor Lake and Sapphire Rapids is also starting to hit there which will be very nice to improve both gross margins as well as the revenue outlook,” said Intel CEO Pat Gelsinger.
For Sapphire Rapids, Intel hopes to accelerate server processors “significantly faster” than the company’s current Xeon Scalable chips, known as Ice Lake, as it expects strong adoption from server makers. and so-called hyperscalers, according to Gelsinger.
“Every hyperscaler, every OEM has many SKUs lined up for this. This product will be extremely well respected, accepted and widely deployed in the market this year,” he said.
Intel hopes the growth of its Network and Edge group, which includes IoT products, will also offset PC sluggishness.
Gelsinger also pointed to the potential for growth with the company’s growing line of discrete GPUs, which includes the new Intel Arc chips for PC. The chipmaker’s GPU and accelerator plans also include upcoming Ponte Vecchio and Arctic Sound products for servers, as well as its Blockscale ASIC for cryptocurrency mining.
GPUs and accelerators are expected to drive revenue for the company’s new group of accelerated computing and graphics systems to more than $1 billion by the end of the year.
“All of this gives us confidence in the second half,” Gelsinger said.
The 10nm ramp comes at a cost – for now
While Intel hopes to fuel much of its growth in 2022 with its 10nm process, the ramp-up of these products has weighed on its operating profits for both the Client Computing group and the Datacenter and AI group in first trimester. The first group was down 34% year-on-year while the other group saw operating profits fall 1%.
On the other hand, Intel said its first-quarter gross margin was 53% and beat its guidance by 100 basis points thanks to improved manufacturing yields and lower factory costs.
But with Intel planning to flood the market with more 10nm processors, the chipmaker expects its gross margin to drop to 51% in the second quarter due to a buildup of pre-qualification reserves.
“We’re going to see some pressure on 10nm in the second quarter. That’s part of the reason why we’re seeing margins down to the bottom of our reported range of 51%,” Zinsner said.
However, Zinsner promised that Intel’s gross margin will rebound to 52% in the second half of the year as the company brings more 10nm products to the masses. “We expect 10nm to become a tailwind for us as costs improve in the second half of the year,” he said.
It’s all part of the plan, says Gelsinger
The production ramp is part of Intel’s costly comeback plan to introduce five new nodes in four years, aiming to outsell foundry rivals TSMC and Samsung by 2025. That, in turn, will help the company to make more competitive products with tastes. from AMD, Nvidia and others that use alternative architectures such as Arm and RISC-V.
But while Intel recently announced that its plan is coming to fruition faster than expected, the plan comes at a huge cost that is expected to weigh on gross margins over the next few years.
Intel shareholders didn’t react well when the company spelled out the costs of the plan in February, and now they’re concerned, in light of Intel’s first-quarter financial results, about the company’s ability to run multiple challenges. Those concerns were reflected in Intel’s stock price, which fell more than 5% on Friday.
For Gelsinger, however, these are important steps Intel must take to get back on top after facing years of setbacks from manufacturing issues.
“We’re excited and think this is the biggest turnaround story ever,” he said during Thursday’s closing call. ®