Intel Corp. shares walked back healthy gains in the extended session Thursday after the chip giant said it will be another year before chips using its next-generation manufacturing process arrive, and margins will take a hit.
Intel INTC, +4.46% shares surged as much as 6% in after-hours trading after the chip maker raised its outlook for the year and soundly beat Wall Street estimates in its largest business segments. The stock dropped to a loss, though, toward the end of a conference call as Intel executives discussed 10-nanometer chips and their effect on margins, and were last up 1%.
Chief Engineering Officer Venkata Renduchintala said on the call he could not give any specific numbers on the 10-nanometer rollout but said the process was “roughly in line” with that of when their 14-nanometer chips were rolled out. Uncertainty about the fate of Intel’s delayed 10-nm chips has been rampant enough to spark rumors that the chip maker was completely abandoning it, rumors that Intel quickly dispelled.
“Nanometers,” or nm, refers to how small a chip maker can make the transistors that go on a computer chip, with the general rule being that smaller transistors are faster and more efficient in using power. Advanced Micro Devices Inc. AMD, -15.45% has been chipping away at Intel’s dominance as its 7nm chip manufacturing process has been hailed as equal or even superior to Intel’s.
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“We believe we’ll have 10-nanometer shipping by holiday of 2019,” Renduchintala said. “And if anything I feel more confident about that this quarter than I did a quarter ago.”
That rollout, however, is expected to weigh on gross margins in the fourth quarter and into 2019 “by roughly a few points,” said Intel Chief Financial Officer Bob Swan, who is serving as interim chief executive.
“That’s a function of the progress we’re making on 10-nanometer,” Swan said, noting that the adjusted 65.9% gross margin reported for the third quarter was “artificially high.”
Late Thursday, Intel reported third-quarter net income of $6.4 billion, or $1.38 a share, compared with $4.52 billion, or 94 cents a share, in the year-ago period. Adjusted earnings were $1.40 a share. Intel was expected to post adjusted earnings of $1.15 a share, according to analysts surveyed by FactSet.
Revenue rose to $19.16 billion from $16.15 billion in the year-ago period. Wall Street expected revenue of $18.13 billion from Intel, according to the FactSet consensus.
Data-center group, or DGC, revenue surged 26% to $6.1 billion from a year ago, topping Wall Street’s expectation of $5.89 billion. That was an important performance from Intel, which is dominant in server chips but has faced challenges in that area from AMD and Nvidia Corp. NVDA, +4.23%
“As expected, data-center is carrying the company in terms of growth,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch.
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Revenue from Intel’s largest segment, client-computing or traditional PC, rose 16% to $10.2 billion, while analysts expected revenue of $9.33 billion. Intel has reportedly been facing issues with producing enough PC chips, which had created feats about that segment that Intel appeared to answer with a strong performance.
Smaller business units were not as strong as expected. Nonvolatile memory solutions revenue grew 21% to $1.1 billion, while analysts had forecast $1.14 billion. “Internet of Things,” or IoT, revenue grew 8% to $919 million from a year ago, while Wall Street expected $952.4 million.
Intel estimates adjusted earnings of $1.22 a share on revenue of about $19 billion for the fourth quarter, and $4.53 a share on revenue of about $71.2 billion for the year. Analysts on average expected earnings of $1.09 a share on revenue of $18.41 billion for the fourth quarter, and $4.15 a share on revenue of $69.54 billion for the year.
Intel shares rose 4.5% in the regular session to close at $44.31. In comparison, the PHLX Semiconductor Index SOX, +2.34% finished Thursday up 2.3%, the Dow Jones Industrial Average DJIA, +1.63% rose 1.6%, the S&P 500 index SPX, +1.86% advanced 1.9%, and the tech-heavy Nasdaq Composite Index COMP, +2.95% gained 3%.
Like Xilinx Inc. XLNX, +15.01% Intel’s outlook proved to be one of the chip sector’s earnings exceptions. Late Wednesday, AMD reported an outlook that fell short of Wall Street estimates, and other chip makers reported similarly weak outlooks earlier in the week.
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Of the 40 analysts who cover Intel, 20 have buy or overweight ratings, 14 have hold ratings and six have sell or underweight ratings, with an average price target of $55.39. For the year, Intel shares were down 4% as of Thursday’s close, compared with a 6.4% decline in the SOX index, about 1% gains in the Dow and S&P 500, and a 6% rise in the Nasdaq.
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