Intel continued its string of successful financial performances today with a record-setting fourth quarter revenue and record yearly revenue. Intel posted an 8% year-over-year (YoY) revenue growth on strength in several of its business groups as it powered to $20.2 billion in revenue, capping a fourth consecutive year of record revenue. Much of the gain came on an impressively strong performance in data center sales, while desktops saw an expected 6% decline in yearly volume, which was partially offset by higher average selling prices (ASP).
Even with the company's stellar financial performance, a few questions weigh heavily going into the earnings call: How is competition from AMD impacting Intel, what is the status of the ongoing chip shortages and the extent of recent purported layoffs, and will Intel expand outsourcing of production capacity? Let's cut through the financial numbers to try to address those questions.
Desktop PC/Server Sales and Impact of AMD Competition
AMD is undoubtedly impacting Intel's desktop PC business, but Intel benefits from its sheer scale. Consider this: Intel's $10 billion in fourth quarter revenue from its PC-centric business alone far outweighs AMD's recent $1.8 billion quarterly revenue for its entire company (graphics and processors). Add in Intel's $7.2 billion in 4Q data center revenue to get a real sense of the challenge ahead of AMD.
But that doesn't mean AMD, which holds the process node advantage for the first time in company history, can't make a dent in Intel's desktop dominance. Intel's client computing group (CCG) notched a 2% gain in revenue compared to last year, notching a 7% increase in processor sales quarter-over-quarter, but the company's desktop PC volumes were down 6% compared to the prior year. Higher average selling prices (ASPs) offset the lowered volume, so Intel still came out ahead in terms of revenue. The lowered volume likely stems from a combination of the ongoing shortages, which we'll cover shortly, and increased competition from AMD, but we won't know the impact of the latter until updated market share figures are released in a few weeks.
Intel upped its revenue guidance for next year, but did cite a waning Windows 10 upgrade cycle as one contributor to slowly falling PC sales projections next year. Intel also cited "increasing competition" as the source of its lowered PC revenue projections for the second half of the 2020, but true to the company's style, it didn't mention AMD by name.
Intel's data center group (DCG) proved to be its biggest surprise, with a whopping 19% quarterly increase in revenue to $7.2 billion propelled by a 48% YoY sales increase to cloud service providers. Unit volumes for the data center group improved 12% on the quarter while average selling prices increased 5%. AMD's EPYC Rome processors are obviously stellar performers, but Intel reiterated that it has continued to focus on minimizing the impact of shortages to its Xeon lineup. Intel's sales figures don't indicate any significant impact from EPYC yet, though we won't know if an expanding market has also benefited AMD until next week.
Shortage Status Improving, 10nm Production
Intel says that it continues to suffer from shortages that have hindered its sales in the desktop PC segment, but noted that it had invested record levels of capex in 2018 and 2019 to address the issue. That ultimately resulted in a "double-digit" increase in production capacity in the second half of 2019 (compared to the first half).
Intel plans to increase its 10nm and 14nm wafer capacity by 25% in 2020, but said demand remains high. That means the shortage will persist until the second half of the year when Intel can begin to fully restore supply of its "small-core" processors (i.e., the low end processors that have suffered as Intel focuses on assuring supply of larger and more profitable models).
Intel says its 10nm yields are "above expectations," which has become a familiar refrain from the company. Intel CEO Bob Swan touted that nine products built on the 10nm process will come to market in 2020, including Tiger Lake, the company's first discrete GPUs, Snow Ridge, ASICs for AI workloads, and Xeon processors. On the latter, Swan reiterated that the company will begin producing Ice Lake processors in the first half of the year, with volume shipments commencing in the second half of 2020. In either case, Swan still tempered expectations for the 10nm node, saying that 14nm would still consist of the majority of the company's shipping processors throughout 2020.
Intel is also already investing heavily in 7nm production and will continue that investment throughout 2020 and into 2021. Swan also noted that the 7nm Ponte Vecchio GPUs are on track for the fourth quarter of 2021. Ponte Vecchio will serve as the lead vehicle for the 7nm node, so it could be 2022 before we 7nm desktop processors come to market.
Reports of large-scale Intel layoffs have dominated the recent news cycle, but the company hasn't confirmed any large workforce reductions. Those reports didn't come up during earnings call, but Intel issued the following statement to Tom's Hardware:
"Changes in our workforce are driven by the priorities of our business, which we continually evaluate. As we move into 2020, our business units are focusing their resources on areas where we have the greatest opportunity for growth and, as part of that, some are planning to eliminate roles associated with projects that are no longer priorities. Wherever possible, we’ve transitioned employees or teams within the company to areas of business need, and we expect this to impact less than 1% of our global workforce, subject to local requirements. We are committed to treating all impacted employees with professionalism and respect, and we continue to hire for critical skills, with more than 1300 positions open in our key locations in the US and globally."
These reductions appear to be the result of a soft restructuring of some of Intel's business groups. Given Intel's rock-solid financial performance, there doesn't seem to be an indication of a large layoff in the future.
Intel has long outsourced a significant portion of its silicon production to third-party fabs, and CEO Bob Swan reiterated that tactic isn't changing any time soon. Intel currently outsources between 20 to 25% of its overall production, but restricts outsourcing to non-CPU products. In response to a question if Intel plans to expand its outsourcing programs, Swan responded:
"...the evaluation of what we do inside and what we do outside is a full-time effort. We'll continue to do it, we'll continue to prioritize where we can get the best, most efficient output, and make those decisions at the time."
Intel appears to be firing on all cylinders as it heads into 2020. The company also experienced growth in a few of its other segments, with IOTG revenue up 13% and the storage arm (NSG) notching a 10% improvement (albeit while operating at a loss). Intel's programmable solutions group (PSG) was the only blot on the company's ledger, with the 17% decline in revenue attributed to soft sales in embedded applications.
Intel projects it will generate $19 billion in the first quarter of 2020, an 18% year-over-year increase, and $73.5 billion for the year. That signals the company is confident in its prospects, even in the face of heightened competition.
During a recent investor conference, the company cited receding margins in the future as it grapples with tougher competition, and the company did drop 3.2 pts of non-GAAP margin on the year, bringing it to 60.1%. That's still plenty profitable in the eyes of most companies, and indicates that Intel has some room to become more competitive on pricing as it debuts its new desktop and data center processors. It also has ~$12 billion in cash reserves. With recent gen-on-gen price cuts to Intel's HEDT lineup suggesting there is more to come, we could see further price reductions when the Comet Lake processors arrive as Intel seeks to protect its position.