Technology | Intel Earnings Slip Despite Record Revenue

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Intel Corp.’s incoming Chief Executive Pat Gelsinger said the semiconductor giant would outsource more chip production, as it posted pandemic-fueled full-year results that also underscored the breadth of challenges the new CEO will face.

Mr. Gelsinger on Thursday said Intel would have other chip companies make more of its products, even if the bulk of its new chips in the coming few years would be made in house. The shift marks a break from Intel’s traditional reliance on its own factories to make its most-advanced chips—effectively an acknowledgment that it has fallen behind chip-making rivals.

The report for 2020 caps a challenging yet lucrative year for the semiconductor giant that saw it surpassed in market valuation by rival Nvidia Corp., dropped by Apple Inc. as a supplier for Mac chips, suffer market-share losses and face a push by activist investor Third Point LLC for strategic changes.

“Intel has gone through cycles before,” Mr. Gelsinger said. “Great companies are able to come back from periods of difficulty and challenge, and they come back stronger, better and more capable than ever. And that, I believe, is the opportunity at Intel.”

The pandemic has helped Intel paper over some of its challenges. Demand for PCs and the chips that go into them hasn’t been this hot in years.

Intel posted record annual sales of $77.9 billion, up from $72 billion in 2019 and ahead of the $75.4 billion Wall Street expected. While Intel has benefited from booming demand for PCs in the work-from-home economy, much of the added buying involved lower-cost laptops that aren’t as profitable. And growing competition is weighing on its bottom line. Net income for 2020 came in at $20.9 billion, down from $21.1 billion a year earlier.

The company said it rushed out its results because of potentially unauthorized access to some earnings-related information. It posted the earnings minutes before market-close rather than after.

Intel shares rose more than 6% late Thursday after the company also boosted its cash dividend—though they subsequently gave up some of those gains.

CEO Bob Swan, whose replacement was announced this month, said: “Intel is in a strong strategic and financial position as we make this leadership transition and take Intel to the next level.”

Intel’s long-term plans for outsourcing of chip production are still taking shape. Mr. Swan said last year that Intel would decide early this year whether to have its advanced chips made by a third party after Asian rivals got a leg up in the development of the next generation of superfast semiconductors. On Thursday’s call, Mr. Swan said a decision on whether to outsource production of Intel’s latest central processing unit would await the official arrival of Mr. Gelsinger, who has been chief executive of VMware Inc.

The company is considering outsourcing production of some of its most prized chips to Asian competitors, in particular Taiwan Semiconductor Manufacturing Co. , the world’s largest and most-advanced contract chip maker, according to people familiar with the matter.

Intel already has decided to recruit TSMC to make coming graphics-processing chips, and the companies have been in talks about deepening their relationship further. Mr. Swan visited the Taiwanese company to discuss potential options in December, according to a person familiar with the trip.

TSMC last year announced plans to build a chip factory in Arizona, its second in the U.S. And the company last week said it planned record capital expenditures of as much as $28 billion this year, a huge increase from last year and an indication, in some analysts’ eyes, that new business from Intel is on the way.

The selection of Mr. Gelsinger, who spent three decades at Intel earlier in his career, was widely hailed. But analysts expect the turnaround in an industry where product-development cycles are measured in years, not months, to take time.

“It’s a good thing to bring in someone new, and particularly someone who has worked at Intel and has a tech background, but whatever path they follow, it will take time to implement,” Wedbush Securities analyst Matthew Bryson said ahead of Thursday’s earnings release.

Mr. Gelsinger said he was pleased with the progress he had seen as Intel tries to recover from production setbacks on its latest chips.

Chip-development cycles are long and recovering from delays can take years. Mr. Swan said the progress seen with its latest technology, known as 7 nanometer—a loose reference to the minuscule size of transistors on chips—would support on-target delivery of the advanced products the company has scheduled for 2023.

Third Point, the activist fund led by Daniel Loeb, took a position of about $1 billion in Intel’s shares and advocated in a December letter for the company to consider an even more foundational change: splitting up its chip-design and manufacturing operations.

Mr. Gelsinger said Intel was committed to its integrated model of designing and producing chips and called the company a “national asset.” He suggested Intel’s success was crucial for the U.S. at a time Congress has been weighing large incentives for domestic chip-making following a decadeslong shift toward Asian manufacturing. “This company needs to be healthy for the technology industry and for technology in America,” he said.

Intel is facing other pressures, including from domestic competitors such as Nvidia and Advanced Micro Devices Inc. Amid Intel’s manufacturing setbacks, AMD has gained market share quickly in central processors for PCs and servers.

Intel said its fourth-quarter sales, while down 1% from a year earlier, topped its expectations on strong demand for laptops and chips used in data centers. Its Mobileye unit, which makes technology for autonomous vehicles, also logged a jump in sales.