5G and Beyond

Intel feels data center squeeze as competition grows

The will-he, won't-he question of a major investment in manufacturing was settled almost as soon as Pat Gelsinger took over the top job at Intel in February.

After announcing plans for a $20 billion splurge on fabs last month, the chip giant's new boss is now under pressure to explain a worrying drop in sales to data center customers, Intel's second-largest division after computing.

Shares fell about 2% after Intel's net income for the first quarter slid 6%, to $5.7 billion, compared with the year-earlier period. Spending rose in connection with turnaround efforts and investment activity.

That included the rollout of chips based on 7-nanometer transistor designs, an area where Intel has fallen behind other semiconductor giants such as Taiwan's TSMC and South Korea's Samsung.

But headline revenues were also flat, at roughly $18.6 billion, despite an 8% increase in sales at Intel's massive computing business. The main problem, its earnings report showed, was a major stumble at the data center group, where revenues fell 20%, to just $5.6 billion. So what happened?

Intel's newest fab in Chandler, Arizona, became operational last year.
Intel's newest fab in Chandler, Arizona, became operational last year.

Intel's story is partly that a direct comparison with the year-earlier period, when sales rose sharply, is unfair. Some of the big customers still appear to be working through inventory they have accumulated.

In Gelsinger's words, they are "digesting and deploying the products that we delivered to them last year," according to a Seeking Alpha transcript.

Another factor was a fall in average selling prices, it seems, due to a change in the mix of products that were being sold. Gelsinger expects prices to rise as customers take advantage of forthcoming chips, including the Ice Lake microprocessors based on 10-nanometer technology.

"Ice Lake is a great product and we are seeing a strong ramp for it," he said on the earnings call. "As the products get better, ASPs will get better and then we are going to be very aggressive in terms of market share in this area."

Yet that does not appear to be the whole truth. One concern for John Pitzer, an analyst with Credit Suisse, is that Intel's decline is the result of tougher competition as well as the "digestion" of inventory supplies.

AMD, one of Intel's big rivals in the data center market, is certainly perceived to have become a bigger threat. Moreover, some of the major cloud companies have been developing their own silicon-based products.

Gravitating to Graviton

A standout example would be Amazon's Graviton, a processor based on designs from UK-based Arm. AWS, the Internet company's cloud-computing business, has been insisting that Graviton comes with "40% better price performance over comparable current generation x86-based instances for a wide variety of workloads."

In striking its public cloud deal with AWS this week, Dish Network revealed that it would run some of its baseband processing over Graviton processors, rather than Intel's FlexRAN platform.

Right now, companies exploring their own designs account for a "modest" share of the market, insisted Gelsinger in his answers to analyst questions. But Intel's strategic pivot to establish a foundry business is partly a response to that challenge.

Besides simply making chips designed by other companies, as TSMC does in Taiwan, Intel wants to make it easier for cloud companies to develop semiconductors based on its x86 technology instead of the alternatives.

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"x86 cores will be available on our foundry services and available for people to design with them," said Gelsinger.

"And we do believe the ability for our customers to take advantage of x86 this way will be a meaningful shift in how people think about Arm versus x86, because part of it was we weren't giving them the flexibility to design to comingle IP [intellectual property], as I have described it."

The decision, in response to government entreaties, to spend $20 billion on new fabs has been welcomed as a move that should diversify the semiconductor supply chain, and make the US less dependent on factories in the vicinity of an increasingly aggressive China.

If they can protect existing business at Intel's second-largest division, then so much the better.

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— Iain Morris, International Editor, Light Reading

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