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Patent punch pushes Intel down, as net income tumbles 41%, data centre chip sales fall 20%

CEO blames "cloud inventory digestion" and a patent loss.

Intel's data centre sales slumped 20% on-year in Q1, sending its share price falling. The company blamed "cloud inventory digestion" as it reported first year revenue of $19.7 billion, down 1%. Net income was down 41% to $3.4 billion for the quarter, in the first earnings call under new CEO Pat Gelsinger -- welcome to the hot seat, Pat.

Gelsinger said he expected server chip sales to pick up on the recent launch of Intel's Ice Lake line (launched April 2021) and on a more flexible approach to chip provision -- as it pivots to offering foundry capacity to customers.

Pressed by analysts on what made Intel think there would be a rebound -- and that this was not part of a fundamental decline as cloud providers swapped to AMD and their own chips, Gelsinger said: "We work intimately with these customers, right? Our people are in their environments, we are working supply chains, we are building forecasts with them, we know what their inventory levels are. These are very intimate relationships."

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He added: "We are also going to be co-designing, co-innovating and bringing new capabilities for them to optimize solutions for their markets as well. We're going to be aggressive in the data center and cloud business going forward...we are going to fight for every socket in the market. This is an area that is core to our business.

"We have just delivered a great new product for it. We are going to be using our system design, our validation, our software assets, our customer relationships, our supply chain, everything that we can to bring value to our customers. They are looking for us, building on that 100 million install base of servers that we have now. This is a great business and one that we are going to be very aggressive in bringing the best things to our customers."

Large hits to margin, net income, tax rate, and EPS results all "reflected the impact of a charge related to VLSI litigation", Intel said, pointing to the decision by a federal jury in Texas in March to award $2.18 billion in damages to VLSI for patent-infringement. (Intel "strongly disagrees" with and is appealing the decision.)

It wasn't all bad news. Intel Q1 revenue exceeded January guidance by $1.1 billion on strong PC demand, with unit volumes up 38%. Intel also achieved better-than-expected revenue in Internet of Things Group (IOTG) and self-driving vehicle technology unit Mobileye, which set new revenue record in the quarter.

Intel: New leader, new strategy

On Gelsinger's first earnings call he laid out further details of Intel's new strategy under his leadership, which includes plans to make Intel's foundries available for customers' own designs, in an unusual move by the chipmaker.

"Our IDM [integrated device manufacturing] 2.0 strategy is about packaging; it’s about the process; it’s about the full set of IP that we are bringing to the table; [it's about] at-scale manufacturing." (Under Intel's IDM 2.0 plans, the company aims to become a "major provider of foundry capacity in the U.S. and Europe".)

Saying the company is already talking to 50 potential customers, Gelsinger told analysts: "We seeing enthusiasm for this idea that they can bring some of their IP and bring our IP to the table, and in particular some of the cloud customers have been very excited about that ability to say, 'hey, I can take some of my cool ideas and be better optimized' and include things like x86 cores to have a more optimized solution for their market requirements. This is compelling for them."

Supply chain pressures continue

The unprecedented demand for semiconductors has stressed supply chains across the industry, Gelsinger pointed out. (Jaguar Land Rover this week temporarily shut down production at two of its main UK factories because of a shortage of computer chips), saying: "We have doubled our internal wafer capacity the last few years, but the industry is now challenged by a shortage of foundry capacity, substrates and components.

"We expect it will take a couple of years for the ecosystem to make the significant investments to address these shortages... IDM 2.0 utilizes our internal factory network to reliably deliver leadership products and provide the industry another source of foundry capacity through our new Intel foundry services. Leveraging our IDM advantage, we are working aggressively across our global supply chain to solve substrate shortages to satisfy our customer’s surging demand and gain market share."

See also: AMD’s $35b Xilinx takeover wins shareholder approval