The cloud of the delays in the switch to semiconductor production using seven nanometer architecture continues to hang over Intel's stock performance. Although the company reported record sales, its share price ended the first day after its fourth quarter 2020 financials were released with a decline of nearly 10%, wiping out the rise on the day before the results came out.
The conference call with analysts following the financials was the last from outgoing Intel CEO Bob Swan, who will be replaced by current VMWare CEO Pat Gelsinger on February 15. The announcement of Gelsinger's return to Intel in the top job sent Intel's share climbing after it had been drifting ever since the release of the second quarter 2020 results last summer, when the share price dropped about 16% following Swan's statement that in certain circumstances the company would consider outsourcing some of its production.
Swan's vague words were replaced by a much more explicit statement from Gelsinger, who spoke alongside Swan in the analysts' call.
The 7-nanometer problems leave no choice
Gelsinger opened on an optimistic note, saying that he was confident that most of the company's products in 2023 would be produced internally. He focused specifically on the issue of advanced production, saying, "I've had the opportunity to personally examine progress on Intel's 7-nanometer technology over the last week. Based on initial reviews, I am pleased with the progress made on the health and recovery of the 7-nanometer program."
Not only did Gelsinger choose to say "most of the products", but this was followed by a further, much more explicit comment on a partial switch to outsourcing. "Given the breadth of our portfolio, it's likely that we will expand our use of external foundries for certain technologies and products," Gelsinger said.
Nevertheless, the assessment both by analysts and by senior people in the semiconductor industry is that for the moment no intention of parting from Intel's fabs lies behind this statement, Sources say that Intel has no choice but to do everything possible to overcome its production challenges.
The prevailing view is that for reasons of efficiency and stability of its supply chain, as well as US national security considerations, Intel cannot forego its production capabilities. On the other hand, given the lengthening delays, the company understands that it will be forced to bite its tongue and obtain assistance from the fabs of Taiwanese company TSMC, which is where all its competitors carry out production, apart from Samsung. Whereas Intel was delayed on 10-nanometer production and is now delayed on 7-nanometer, both TSMC and Samsung are now already producing at 5-nanometers.
As Intel's delay in next generation production goes on, the beneficiaries of TSMC's improved production capabilities are its rivals ARM and Nvidia, once small, niche semiconductor design companies, and today a potential existential threat. Along with them other, future competitors could also benefit. These now come from a different direction: giants like Google and Facebook, that are aiming at independence in the design of AI chips for their internal use, Apple, which recently parted from Intel to produce its own ARM-based chips, and even Amazon, which could also become a competitor to Intel in the future through chips that it develops independently for its cloud service AWS.
Gelsinger asked not to amplify on the subject and promised further details, as well as details of the road map for 2023, "once I fully assess the analysis that has been done and the best path forward." He also said that publication of the company's annual guidance would wait until he took up his post fully, but promised that it would happen "no later than on our next earnings call in April."
Not yet a cause for concern in Israel
Intel has some 14,000 employees in Israel, and in 2019 its exports from Israel were worth $6.6 billion, 12.5% of the country's total high-tech exports and about 1.6% of its GDP. For the time being, the possibility that Intel will outsource some of its production should not cause concern in Israel. Intel invests huge amounts in research and development - $13.5 billion last year. There is a reasonable chance that it will eventually succeed in overcoming the obstacles and will close the gap in production capabilities, even if it means changing and adapting and taking extreme action as TSMC did, such as working in shifts.
Furthermore, the production process, whether it's ten, seven, of five nanometers, is only one of the factors that determines the quality of a chip. Intel has developed other technologies that could perhaps partially compensate for the delays in introducing advanced production. Thirdly, the advanced fabs in Israel can be used for producing advanced chips for many more years, even if Intel uses external fabs for the highest performance chip segment.
The release of the financials was accompanied by a minor scandal when a graphic presentation that included details from the financials was leaked before the time that the financials were due to be published, at the close of trading on Thursday. Intel brought forward the release of the financials, and denied that the cause of the leak was a break-in to its systems.
In the reports themselves, Intel presented results that outdid both its own guidance and the analysts' estimates. Intel benefitted from the switch to working from home, which boosted global demand for personal computers. In the last quarter of 2020, a third more computers with Intel processors were sold than in the corresponding quarter of 2019.
Swan reported record revenue in the company's two main segments - personal computers (client) and data centers - and also in memory and in the revenue of Mobileye, the Israeli ADAS company that Intel bought in 2017 for $15 billion.
Intel's revenue in in the fourth quarter of 2020 was $20 billion, $2.6 billion more than the consensus analysts' estimate, but 1% less than in the corresponding quarter. Net profit for the quarter was $5.9 billion, 15% less than in the corresponding quarter. Mobileye's quarterly revenue shot up 39% in comparison with the corresponding quarter to $967 million, and its operating profit was $100 million.
Intel's total revenue for 2020 was $77.9 billion, 8% more than in 2019. Annual profit was $20.9 billion, 1% below the profit for 2019.
Published by Globes, Israel business news - en.globes.co.il - on January 25, 2021
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