Semiconductor giant Intel has unveiled lacklustre quarterly results, including a 20% drop in its data centre business at the start of 2021. The $5.6bn sales from Intel’s second-biggest sector saw the company’s total revenues fall by 1% to $19.7bn, down from $19.8bn in the first quarter of 2020. Intel shares were down 3.1% to $60.60 in after-hours trading following the news.

Intel executives said that the problems resulted from a surplus of inventory and Cloud “digestion” – the suggestion being that Cloud providers, having ordered lots of chips in previous quarters, are now putting them into data centres and getting customers set up using them before they buy some more. This would be a more palatable scenario than Intel losing market share.

The disappointing data centre results couldn’t quite be offset by a good quarter for Intel’s PC business which enjoyed an 8% boom year on year, growing to $10.6bn in sales.

Pat Gelsinger, who stepped up as CEO in February, said that the $236.8bn company is working on resolving manufacturing issues that have caused it to fall behind rival companies like Advanced Micro Devices (AMD) and Nvidia. In March, Intel announced a major expansion plan to build new factories in the United States and Europe.

He also hailed Intel’s announcement of its highly anticipated “Ice Lake” processors at the beginning of April as “superb” during a conference call about Intel’s quarterly results. The new processor was the first from its much delayed 10nm (nanometre) process node and is central to Intel’s plans to make up ground lost to competitors.

Gelsinger said he expected that “customers are almost through the [cloud] digestion” and that “they want to start the next build phase in their cloud.”

Intel is an integrated device manufacturer, meaning it both designs and manufactures integrated circuits. Other players in the chip industry, such as Qualcomm and Nvidia, create semiconductor designs but outsource manufacturing to separate companies with fabrication plants.

Gelsinger said that this has empowered Intel to ride out the global chip shortage better than some of its rivals. Nevertheless, the chip goliath warned that shortfalls of third-party components needed to build complete computers could hold back its sales this year.

Gelsinger’s optimistic outlook didn’t stop market analysts from grilling him about Intel’s ability to keep up with competitors. They asked him when profitability will start to grow. Gelsinger responded that the company is now in “investment mode” during a critical period for its return to leadership, pledging to deliver products – like “Ice Lake” – that will bring the company back to the head of the pack.

“Our overall outlook for the year is that we are going to continue to see that momentum build as we go through the year and expect to see the business response, the competitive position, the customers getting on board,” Gelsinger said.

Analysts are, however, not as confident about Intel’s prospects in the short term.

“Intel tried to blame the 20% decline quarter-on-quarter in data centre sales on ‘cloud digestion’ but clearly it also suffered a further loss in market share, particularly to AMD,” Mike Orme and David Bicknell, analysts from GlobalData’s thematic team, told Verdict. “This was reflected in the deep dip in its gross margin.

“More worrying short term was the admission that there will be several months delay in bringing its crucial 7nm process technology up to speed, questioning its ability to get to grips with lagging manufacturing problems. But we are only two months or so into a radical Intel reset under new CEO Pat Gelsinger which will take up to four years to complete. Intel’s Q1 results actually beat Wall Street estimates in revenues and earnings per share, despite the data centre setback.”

GlobalData’s thematic research also cautioned that it’s not just the growing competition Intel has to worry about, but also its over-reliance on a limited number of customers for the majority of its revenue. Its largest clients include Dell, Lenovo and HP. If any of these companies cancelled or delayed significant orders, it could severely affect Intel’s bottom line.

Intel’s quarterly results also comes at a time when the data centre sector is only set to grow. According to GlobalData forecasts, the market was worth $466bn in 2020. It is estimated that it will see a compound annual growth rate of 6.7% over the next decade to $948bn by 2030.

Today, investment firms Davidson Kempner and Pioneer Point Partners announced plans for a new $4.21bn data centre in Portugal. Microsoft, Dell, IBM, Samsung, Oracle, Cisco and Tencent have also announced new centres recently.