Intel turns unexpected profit, higher forecast as PC market slide slows

The market for personal computers has tumbled over the past year

(Reuters) - Chipmaker Intel (INTC.O) on Thursday posted a surprise quarterly profit as a PC market slump started to ease, and forecast third-quarter earnings above Wall Street expectations, sending its shares up about 6%.

The market for personal computers has tumbled over the past year, with inventory piling up because consumers had already bought machines needed during the pandemic.

But the glut has started to ease, with PC shipments falling only 11.5% in the June quarter compared to a 30% slump in each of the previous two quarters, Canalys data showed.

The PC market improvement prompted Intel to forecast better margins for the third quarter. Its margins in recent quarters were nearly half its historical highs, but Intel said on Thursday it expects profit margins to improve in the second half of the year.

"Intel did outperform almost exclusively on the strength of desktop sales which rebounded from a near-record low last quarter," said Edward Snyder, analyst at Charter Equity Research.

Intel's stock rally added nearly $9 billion to the company's market value, which in recent years has fallen far below that of rivals including Nvidia (NVDA.O), Advanced Micro Devices (AMD.O) and Broadcom (AVGO.O).

After over four consecutive quarters of deep declines across its biggest segment that includes personal computers, revenue dropped 12% to $6.8 billion, from $7.7 billion in the year-ago period.

"There's a lot of interest in the industry for advanced packaging, because it is essential to deliver high-performance computing and AI," Gelsinger said. "So we expect a lot more business coming our way in that area."

On Tuesday, the company said it would work with Swedish telecommunications gear maker Ericsson (ERICb.ST) on a chip that Intel will fabricate with its most advanced manufacturing technology it has disclosed.

LAGGING IN AI Sales in Intel's data center and artificial intelligence business fell 15% to $4 billion from $4.7 billion in the year-ago quarter.

Those results beat Wall Street estimates, but reflect that cloud majors Microsoft (MSFT.O) and Alphabet expect to ramp up spending on data centers with most of the spending benefiting Nvidia (NVDA.O) that makes chips for AI.

The focus on chips that are suited for AI computing in the cloud have hurt the market for server chips for Intel, as has a sluggish recovery in China.

"It is still very clear that Intel is absolutely losing share around server CPUs, and I think it is fair to say that they are fighting for relevance in AI," said Jenny Hardy, portfolio manager at GP Bullhound that owns AMD and Nvidia stock.

An inventory glut in server central processing units (CPUs), will persist until the second half of the year, Gelsinger said on the conference call, and that data center chip sales will decline modestly in the third quarter before recovering in the fourth quarter.

Gelsinger said right now Intel has enough customer orders to sell at least $1 billion worth of its AI chips through 2024.

Intel forecast adjusted current-quarter earnings per share of 20 cents. Analysts polled by Refinitiv expected 16 cents.

It forecast adjusted revenue of about $12.9 billion to $13.9 billion, compared to estimates of $13.23 billion. The midpoint of $13.4 billion exceeded estimates but still implies a 12.6% drop over the year in Intel's business.

Intel forecast adjusted gross margin of 43% for the third quarter, compared to estimates of 40.6%.

Intel shares have risen about 30% so far this year, compared to a 50% rise on the Philadelphia SE Semiconductor index (.SOX) in anticipation of an industry recovery.