Intel Expects CPU Shortage To Worsen In Q3 As PC Sales Grow

Intel CEO Pat Gelsinger says he expects shortages to ‘bottom out’ in the second half of 2021, but it will take another one to two years ‘before the industry is able to completely catch up with demand.’ Intel has decided to absorb some of the inflated costs that have been spurred by component shortages, which Gelsinger says is important for rebuilding trust with partners.

Intel is warning that the CPU shortage for PCs will worsen in the third quarter as the company continued to see steady sales growth in the segment. The good news is that the semiconductor giant said it’s not passing on some of the increased costs caused by supply constraints to partners and customers.

“We expect supply shortages to continue for several quarters, but [they] appear to be particularly acute for client [CPUs] in Q3,” said George S. Davis, Intel’s CFO, during the Thursday earnings call for the company’s second quarter, where a new record was reported for its PC business while data center revenue continued to decline.

[Related: Intel Reorganization: 8 Big Changes Made Under Pat Gelsinger]

Davis said the CPU shortage is expected to drag down Client Computing Group revenue sequentially in the third quarter, which began in July.

However, Intel has decided to absorb some of the inflated costs that have been spurred by semiconductor component shortages, which Intel CEO Pat Gelsinger said is an important way the company is trying to rebuild trust with partners and customers.

“We’re not passing through all of our supply constraint price increases that we’re seeing from our supply chain,” he said on the earnings call. “We really see this as an opportunity to be investing with our customers, rebuilding their confidence and partnership for the future, and we’re feeling very good about our overall strength, momentum and competitiveness as we go into the second half.”

Gelsinger said he expects shortages to “bottom out” in the second half of this year, but it will take another one to two years “before the industry is able to completely catch up with demand.” He added that the company’s new IDM 2.0 hybrid manufacturing strategy will play an important role.

“IDM 2.0, which combines our internal manufacturing capacity with the use of third-party foundries, best positions us to weather these challenges and work with our ecosystem partners to build a more resilient supply chain,” he said.

The company’s plan to build new fabs in Arizona and elsewhere is meant to support the new Intel Foundry Services business, which will manufacture chips for other companies and already has what Gelsinger said was 100 potential customers lined up. But Davis stressed that getting Intel caught up with its own supply needs is the first priority with the new manufacturing capacity.

But until that capacity is fully built out, Intel has been getting creative in how to satisfy the supply needs of partners and customers.

Davis said Intel’s customers “really challenged” the company’s sales and manufacturing teams in the second quarter to mix and match products with customers based on what was available.

“Watching it was super impressive. A little bit scary at times, but the team did a fantastic job,” he said.

To help with the shortage of substrates, a critical component in chip manufacturing, Intel has been using its internal assembly test network to fill gaps in the substrate manufacturing process, according to Gelsinger. That effort is now online, he said, “and it’s significantly accelerating the availability of millions of substrates for our products,” which he considered a major benefit of Intel’s IDM 2.0 strategy.

Another benefit of Intel’s IDM 2.0 strategy, Gelsinger said, is that the company’s IMS nanofabrication unit, which provides a “large majority” of tools for writing EUV masks, a critical component for the company’s in-development 7-nanometer manufacturing process.

“We plan to accelerate investments to advance this pivotal ecosystem capability,” he said.

Despite all the talk of shortages, Intel said it hit a new record for its PC business, the Client Computing Group, whose revenue grew 6 percent year-over-year to $10.1 billion. To help underline what’s driving this growth, Gelsinger said Intel’s partners are back to shipping more than 1 million PCs per day.

Gelsinger said he expects the total addressable market for PCs will continue to grow in 2022 and beyond due to three factors: increased PC density in households, shorter refresh cycles, and new markets adopting PC as worldwide gross domestic product grows. For the final factor, Gelsinger pointed to how most students and teachers in the world still don’t have PCs.

“These trends underpin my belief that we are still in the early stages of sustainable cycle of PC growth and our OEM and channel partners have resoundingly affirmed this perspective,” he said.

However, Intel’s Data Center Group continued its fourth consecutive quarter of sales decline, with revenue in the second quarter down 9 percent to $6.5 billion. Davis said part of this was a function of its incredibly strong second quarter in 2020, but it was also due to a “continued competitive environment.”

The silver lining was that the Data Center Group’s enterprise segment returned to year-over-year growth, and Gelsinger said Intel is expecting to see a return to growth for cloud segment in the second half of 2021, which he expects will bring the business back to double-digit year-over-year growth.

“We’ll be very competitive with that business, but it’s a supply-constrained environment overall,” he said.

Intel’s second-quarter revenue was $18.5 billion, 2 percent higher from the same period last year and $700 million higher than Wall Street’s expectations. The company’s earnings per share was $1.28, which came in at 21 cents higher than what analysts had projected.

With the semiconductor giant performing better than it expected in the second quarter, Intel increased its forecast for full-year 2021 revenue by $1 billion to $73.5 billion, which means the company now expects annual revenue to grow by 1 percent this year. For the third quarter, it expects revenue to grow 5 percent year-over-year to $18.2 billion.

Intel’s stock was down more than 1.5 percent in after-hours trading Thursday.