Intel surpasses Wall Street expectations with high margins for fourth quarter

Intel has predicted higher fourth quarter revenue and margins than the estimates of Wall Street on Thursday, 26 October, 2023. The software company has been optimistic about a computer sales rebound, which is supported by the fact that there have been a growing number of customers seeking manufacturing services.

Intel has some heavy competition from Nvidia in its data center chip market, and the rise in sales of PCs has helped the company raise gross margins faster than analysts had expected.
However, the top executives of the company fear that it could take a whole year to increase the margin significantly.

Intel, based in Santa Clara, California, experienced a rise of 8% in shares after the closing bell on Thursday, 26 October, 2023.

The company was also successful in securing three new contracts for chip manufacturing. Pat Gelsinger, Chief Executive, is hoping to secure another contract by the end of 2023.

The decline in global shipment of personal computers narrowed down to just 7% in Q3 after it had touched double digits earlier this year. Research firm Canalys feels that the market is set to grow substantially during the upcoming holiday season.

The company has estimated a revenue of $14.6 billion to $15.6 billion, while LSEG data predicts a revenue of $14.35 billion.

Significant investments in heavy manufacturing to support Gelsinger's turnaround strategy have had a negative impact on the company's gross margin. In the second quarter, the gross margin contracted to the mid-30s, down from over 60% in 2020. However, in the third quarter, the adjusted gross margin rebounded to 45.8%, surpassing the estimated 42.7%, according to LSEG data.

During an interview, Gelsinger revealed that Intel has secured a fourth foundry customer for its advanced manufacturing process, known as "18A." Production is scheduled to commence in late 2024, with these services being offered through Intel Foundry Services. Gelsinger expressed optimism, stating, "We now have three committed customers for 18A, and we anticipate concluding at least one more this quarter." He refrained from disclosing the exact number of chips Intel will manufacture for these customers but emphasized that the initial customer is "a very significant one." The subsequent two customers, while not as large as the first, hold significant importance, as Intel is now engaged with a prestigious clientele of foundry customers.

During a conference call with analysts, Gelsinger disclosed that Intel is in discussions with six new customers for its advanced packaging business. These developments have been described as victories in competition with TSMC (Taiwan Semiconductor Manufacturing Co.), the world's largest chipmaker.

In the third quarter, Intel reported adjusted profits of 41 cents per share, surpassing the estimated 22 cents according to LSEG data, even as revenue experienced an 8% decline to $14.2 billion. The client segment, housing Intel's PC business, also reported a 3% drop in revenue to $7.9 billion. Regarding potential competition in the PC chip market from Nvidia, Gelsinger expressed that they do not foresee it being significantly impactful. However, he mentioned that arm-based chips for PCs could present a promising opportunity for their foundry business.

Intel's Chief Financial Officer, David Zinsner, anticipates a slowdown in sales of its programmable chips in the fourth quarter, as well as a few quarters of sluggish sales in the upcoming year. Intel recently announced plans to spin off this business in an initial public offering.
The data center business, which also houses Intel's AI chip division, experienced a 10% drop in sales to $3.8 billion. Nevertheless, Gelsinger noted a surge in interest for their "Gaudi" AI chips, with demand now outstripping supply. Despite the ongoing conflict in Israel with Hamas, Gelsinger assured that Intel's factories in Israel are meeting their commitments without any disruptions."