Intel Stock Drops After Slashing Its Forecast For 2019

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The world's leading x86 processor manufacturer reported its earnings for the first quarter today and the news is somewhat gloomy for 2019 - revenue expectations got slashed for the remainder of the year. In terms of last quarter, Intel (NASDAQ:INTC) reported Q1 earnings and revenue roughly in-line, if maybe a bit shy of many analysts' expectations.

  • Q1 earnings per share (adjusted): 89 cents versus $1.01 expected
  • Q1 Revenue: $16.1 billion versus $16.8 billion expected
  • 2019 outlook now down 3% year over year
  • Q2'19 outlook down 8% year over year

The Santa Clara, CA-based semiconductor firm reported first quarter revenue of $16.1 billion, about flat year over year. Its data center business brought in $7.5B while its PC-focused product lines booked $8.6B in revenue.

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Non-GAAP operating margin took a 2ppt to 28 percent with the company citing average selling price strengths getting ofset by high costs associated with its 10nm process ramp. According to Intel, its spend totals about 30 percent of total revenue (things like R&D and operating expenses), down from 32 percent a year ago.

Intel CEO announces firm is "taking a cautious view of the year"

The biggest takeaway today is that Intel is lowering its outlook for the year. The company expects to shrink 3 percent versus 2018 after forecasting $69B for the year, slightly off from consensus estimates of $71.05B.

The revenue guidance for the second quarter is particularly bad, with the firm expecting to see revenue drop 8 percent year over year. Analysts were calling for $16.85B in Q2 and Intel believes it can only deliver $15.6B. Earnings looks worse as Intel expects a 14 percent drop here YoY.

Intel's newly appointed CEO Bob Swan delivered the disappointing news to investors during today's earnings call.

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Looking ahead, we're taking a more cautious view of the year, although we expect market conditions to improve in the second half. Our team is focused on expanding our market opportunity, accelerating our innovation and improving execution while evolving our culture. We aim to capitalize on key technology inflections that set us up to play a larger role in our customers’ successes, while improving returns to our owners.

-Bob Swan, CEO Intel

Intel expects its 10nm ramp to improve things in the latter half, and of course the firm is bracing for impact when rival AMD launches its refreshed 7nm product stack that will go after both PC and data center business later in the year.

Intel's PC business remained strong but was offset by weakness in the data center

Intel's data-centric revenue dropped 5 percent YoY to $7.4B. In contrast to that, its PC-centric revenue rose by 4 percent to $8.6B.

Hardest hit under Intel's 'Data Center Group' umbrella was the enterprise and government  sub-segment that saw revenue decline for the quarter at 21 percent, however the division was buoyed by a 5 percent increase in cloud related revenue.

The Client Computing Group, makers of all things Core, Pentium, and Celeron among others, was up 4 percent to $8.6B. Its nice that Intel specifically breaks out the Notebook and Desktop market segments. We can see from the slide below Intel saw a very minimal decline in desktop processors from a year ago and saw a healthy five percent gain for notebook-related products. It managed to increase the ASP for notebooks by 13 percent, however PC volume totals dropped 7 percent.

Intel's 2019 outlook

So just why is Intel forecasting weak numbers for the remainder of the year? We are most likely witnessing Intel guiding down for 2019 as a direct response to the very real threat that AMD is presenting to the chip-maker.

It seems Intel has weathered 2018 and the first quarter of 2019 very well with its aging Core micro-architecture when it comes to desktop and laptop PCs. The warning bells begin to go off when we take a look at Intel's data center business. AMD has been reporting small, but consistent inroads to this market with its EPYC line of processors, and once the next generation of 7nm EPYC parts lands later this year, things will become even more competitive for Chipzilla.

Intel is in a difficult spot since the firm has been experiencing very well publicized delays and cost overruns on its troubled 10nm process. While Intel's foundries have been an asset to the company for many years, now its becoming a liability in some ways as the company is forced into spending massively on its R&D to bring its 7nm-equivalent process to bear while watching the clock tick by.

AMD (NASDAQ:AMD), once tied to a constricting wafer supply agreement with Global Foundries, has basically paid its way out of that in order to allow it to use TSMC and its now-mature 7nm node, and don't forget AMD has already mapped out its approach to using chiplet designs to further reduce costs, and it seems Intel is finally getting on board with that design philosophy as well. With hybrid 7nm/14nm chiplet designs aimed at cutting costs, AMD will be able to hit aggressive price points when its next iteration of Ryzen and EPYC products ship in the coming months.

While today's results aren't exactly stellar for Intel and its investors, the company is by no means worried when it comes to long term prospects. Intel's misstep on 10nm is an "exception" rather than the "rule", and eventually Intel will get it ironed out. The company has stated that its on-track for 5nm deployment which has been developed in parallel. And of course, Intel is working to roll-out its next generation of x86 microarchitecture. Famed CPU architect Jim Keller, who lead the design work for AMD's Zen core, is now at Intel and there's no doubt that he's been tasked with leading the team responsible for the Core successor, which by now has grown quite long in the tooth.


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