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Earnings Results: Intel stock punished again as slimmer profit margins ding earnings forecast, but CEO sticks to his plan

Intel Corp. executives expect profit margins to remain pressured in the long term as the chip maker builds out manufacturing capacity, leading to a disappointing earnings guidance that dinged the company’s stock Wednesday afternoon.

Profit margins took center stage in Intel’s INTC, +1.35% earnings report for a second consecutive quarter, as the company’s earnings forecast fell below Wall Street expectations. Intel forecast GAAP gross margins of 49%, and non-GAAP margins of 52% for the first quarter, which is expected to translate into GAAP earnings of 70 cents a share and non-GAAP earnings of 80 cents a share.

Analysts on average expected adjusted first-quarter earnings of 86 cents a share on revenue of $17.61 billion, while Intel forecast revenue of about $18.3 billion. Shares declined about 3% in after-hours trading following the results, after closing up 1.4% in the regular session at $51.69.

Intel executives plan to spend freely to build out manufacturing capacity amid a semiconductor shortage, which has caught the ire of many analysts who are concerned the company’s aggressive capital buildout plans would weigh too heavily on profit margins. Last week, Intel confirmed it plans to invest more than $20 billion in a massive chip fabrication plant in Ohio, in addition to fabs in Arizona.

On the call, Intel Chief Executive Pat Gelsinger told analysts that the company has “a lot of catching up to do” in building out capacity, or “shells,” to address supply constraints.

“Boy, I lust for having a free shell today that we could be ramping into,” Gelsinger told analysts. “We simply have to build some more shell capacity and then we’ll be determining where is the best use and how to fill that as we start to build out.”

Read: Chips may be sold out for 2022 thanks to shortage, but investors are worried about the end of the party

Chief Financial Officer David Zinsner said on his first earnings call with Intel that he feels comfortable with a 51% to 53% range in gross margin for the year. Longer term, Gelsinger said he expects margin recovery in the latter term of the five-year window he outlined last quarter.

Zinsner, formerly CFO of Micron Technology Inc. MU, +1.55%, said that Intel would provide full-year guidance at its Feb. 17 investor meeting.

In the fourth quarter, Intel reported that gross margins declined to 53.6% on a GAAP basis from 56.8% a year ago, and to 55.4% on a non-GAAP basis from 60% a year ago. Intel had forecast margins of 53.5% for the fourth quarter, and Gelsinger assured analysts last quarter that margins would remain “comfortably above 50%”

Intel reported fourth-quarter net income of $4.62 billion, or $1.13 a share, compared with $5.86 billion, or $1.42 a share, in the year-ago period. After adjusting for acquisition-related expenses and other items, Intel reported earnings of $1.09 a share, compared with $1.52 a share from a year ago.

Read: Chip sector flirting with bear-market territory as semiconductor earnings kick off

Revenue rose to $20.53 billion from $19.98 billion in the year-ago quarter. Excluding the company’s divested memory business, revenue came in at $19.53 billion, up from $18.86 billion in the year-ago period.

Analysts expected adjusted earnings of 90 cents a share on revenue of $18.33 billion, based on Intel’s forecast of 90 cents a share and revenue of about $18.3 billion.

For the fourth quarter, revenue in the important data-center category surged 20% to $7.3 billion, above the Street’s estimate of $6.73 billion. Revenue from client computing, the traditional PC group, declined 7% to $10.1 billion, but still beat Wall Street’s estimate of $9.59 billion.

Read: The pandemic PC boom gave personal computers their biggest year in nearly a decade

Nonvolatile memory solutions revenue declined 18% to $1 billion when analysts expected $1.06 billion; “Internet of Things,” or IoT, revenue rose 36% to $1.1 billion versus the expected $1.06 billion; and Mobileye revenue rose 7% to $356 million versus the Street’s expected $355.1 million.

Intel also announced its board increased the annual dividend by 5% to $1.46 a share. Wednesday’s earnings report comes on the heels of a report earlier in the day that Intel won its appeal against a $1.2 billion EU antitrust fine.

Earlier in the month, Intel said at CES it was releasing its “Alchemist” Arc ray-tracing graphics chip to compete with the likes of Nvidia Corp. NVDA, +2.01% and Advanced Micro Devices Inc. AMD, -0.38% in the hot GPU market.

Late Tuesday, Texas Instruments Inc. TXN, +2.51% kicked off earnings season for U.S. chip makers, reporting quarterly results and an outlook that topped Wall Street expectations. AMD reports its earnings on Tuesday, and Nvidia is scheduled to report on Feb. 16, the day before Intel’s meeting.

Over the past 12 months, Intel stock has fallen 5%. Over the same period, the Dow Jones Industrial Average   DJIA, -0.38% — which counts Intel as a component — has gained 12%, both the PHLX Semiconductor Index SOX, +1.68% and the S&P 500 index  SPX, -0.15% have advanced 15%, and the tech-heavy Nasdaq Composite Index COMP, +0.02% has ticked 2% higher.

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