Intel's blowout first-quarter earnings included an unusual contributor to its margin expansion: the company sold chips that would ordinarily have been thrown away.
Technology analyst Ben Bajarin said Intel's investor relations team confirmed that part of the 650-basis-point gross margin beat came from salvaging lower-quality dies cut from the edges of silicon wafers that would normally be classified as scrap.
When chipmakers slice individual processors from a circular wafer, the dies near the edges tend to have more defects and lower performance than those from the centre.
If a chip falls short of the specification for a high-end product but still functions, the manufacturer can "bin" it down, relabelling it as a lower-tier product and selling it at a reduced price.
In normal market conditions, some of those edge dies would not make even that cut and would be discarded.
Intel told Bajarin that demand for server processors is currently so strong that customers are buying everything the company can produce, including chips that would previously have been considered unsaleable.
The dynamic allowed Intel to convert wafers that would have generated little or no revenue into sellable product, lifting gross margins beyond what improved manufacturing yields alone would explain.
Non-GAAP gross margins hit 41% in the quarter, compared with guidance of 34.5%, while revenue reached $13.6 billion against consensus expectations of $12.4 billion.
Non-GAAP earnings per share came in at $0.29 versus forecasts of $0.01, a beat so large that one analyst described it as "a complete reset of the Intel thesis."
Shares surged more than 20% in after-hours trading.
Chief financial officer Dave Zinsner cautioned on the earnings call that the inventory benefits seen in the first quarter are not expected to repeat in the second, guiding gross margins down to 39% for the current period.
The underlying demand picture remains robust.
Intel's data centre and AI segment grew 22% year on year to $5.1 billion, driven by sustained orders for Xeon server processors from OEMs including Dell, HP and Lenovo and hyperscalers such as Microsoft, Google and Amazon.
Chief executive Lip-Bu Tan attributed the strength to a structural shift in AI workloads from GPU-intensive training towards inference and agentic tasks, where CPUs play a larger role.
"The CPU is reinserting itself as the indispensable foundation of the AI era," Tan said.
"This isn't just our wishful thinking, it's what we hear from our customers."
Intel said it expects revenue would have been higher still had it been able to produce more chips, pointing to supply constraints that limited upside even as it sold products it would previously have discarded.
The recap
- Intel sold lower-quality dies as downgraded SKUs for revenue.
- Q1 revenue $13.6 billion, Non-GAAP gross margin 41%.
- Demand driven by AI workloads from OEMs and hyperscalers.
