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Intel Raises Outlook by $500 Million Amid Lower Desktop Processor Sales

(Image credit: Intel)

Intel announced its Q2 2019 financial earnings today as the company continues to grapple with a nagging shortage of production capacity that impacts low-end processors and as it faces a renewed AMD's new lineup of Ryzen 3000-series processors. Intel also faces challenges borne of the ongoing trade war and new additions to the U.S.'s entity list, but the company still posted solid results that outstripped analyst expectations. As expected following any good news, Intel's stock is currently up 6% in after-hours trading.

Intel's 2Q 2019 revenue weighed in at $16.5 billion, a 3% reduction year-over-year (YoY), but that outstripped projections by $900 million. As a result, Intel increased its full-year revenue guide by $500 million. Intel also announced a $1 billion deal to sell most of its 5G modem business to Apple.

Swan noted that some anxiety over the status of the US entity list and the trade war, which injects some uncertainty into the company's outlook. As per usual, the company did not respond, beyond generalities, to questions about the competitive pressure it is facing from AMD.

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Desktop PC sales volume slid 4% quarter-over-quarter, for a total of 9% YoY, which Intel attributed to the continuing shortage of 14nm production capacity that the company says has lasted "longer than expected." As such, the company has reduced its small-core CPU output (think Atom, Pentium) to focus on selling higher-margin products, but that has come at the erosion of sales on the low end.

It's rational to expect that AMD soaked up some of that market share, but we'll have to wait for both AMD's earnings call next week (and third-party analyst reports) to gauge how much of this share loss came at the expense of AMD's processors. In either case, Intel's stronger mix of high-margin products that carry higher average selling prices (ASPs) helped offset the reduction in desktop processor sales. All told, Intel's desktop PC revenue was up 1% YoY.

Intel noted that its Ice Lake processors have passed qualification and are now shipping. Swan also said that yields are improving as the company continues to work more products through its two active 10nm foundries. The company cited continued investments in its 10nm ramp, along with investments in the following 7nm process that it says will come to market in 2021, as weighing on its operating margins.

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Intel also experienced softness in its sales of data center processors, with its Data Center Group (DCG) revenue falling 10% YoY, which the company attributed to continuing 'capacity consumption' from its customers, meaning they are still deploying processors bought in prior quarters (mostly stockpiles built up before the then-looming trade war), and plummeting sales to enterprises and governments, primarily in China. Again, Intel noted that increased ASPs helped blunt the blow.

Intel CEO Bob Swan also noted during the call that the company had ceased shipping processors to some customers due to additions to the U.S. Entity List, which means the US government has blocked those sales, but that it had resumed shipments to several as-yet-unnamed customers impacted by the restrictions.

Swan said that production on 10nm Ice Lake data center processors would begin in the first half of 2020, with volume production expected in the second half of that year.

Intel's Non-volatile Storage Group (DCG) took the heaviest hit with a 13% revenue reduction YoY, which comes as the result of an ongoing NAND glut that has seen ASPs decline tremendously.

Intel's continuous diversification efforts have also found it investing heavily in other segments, such as its 5G modem business, which the company announced that it had sold to Apple today for $1 billion in a deal that allows Intel to retain access to much of its IP for PC, IoT, and autonomous driving segments.

  • bit_user
    As expected following any good news, Intel's stock is currently up 6% in after-hours trading.
    Didn't you ever hear the phrase "buy on the rumor, sell on the news"?

    What that means is that this was unexpectedly good news. Otherwise, it already would've been priced in, and there'd even be some profit-taking.
    Reply
  • InvalidError
    One year of Ryzen 2k, -9% Intel CPUs by volume which Intel still blames primarily on shortages which are forcing it to constrain supply of low-end parts, +1% in desktop income. Ryzen not making any sort of meaningful dent in Intel's bottom line is a surprisingly good result.
    Reply
  • jimmysmitty
    InvalidError said:
    One year of Ryzen 2k, -9% Intel CPUs by volume which Intel still blames primarily on shortages which are forcing it to constrain supply of low-end parts, +1% in desktop income. Ryzen not making any sort of meaningful dent in Intel's bottom line is a surprisingly good result.

    Technically two years of Zen even though the first one wasn't as good as the second.

    Still there is more to it than desktop sales. It might come around next year with 3 full years of stiff competition but I doubt it will be enough to do any major damage long term.
    Reply
  • InvalidError
    jimmysmitty said:
    Still there is more to it than desktop sales. It might come around next year with 3 full years of stiff competition but I doubt it will be enough to do any major damage long term.
    In the corporate space (where the bulk of Intel's business lies), three years as a new entrant (AMD's effective status after ~10 years of being MIA) is barely enough to gain market traction if when you maintain a flawless track record and Ryzen launches were far from flawless. While Intel may be more vulnerable to Spectre and other side-channel exploits, I'm betting most IT pros who have reviewed the papers have concluded that the flaws are not materially relevant on desktops and most servers.
    Reply
  • digitalgriffin
    I would like to see the numbers EXCLUDING one time earnings sources like sales.

    Intel is now in contraction mode. Like any business, Intel will look to sell off investments that aren't profitable (ie: 5G Modem) to keep EPS up and keep investors from leaving.

    The ASP*Volume, margin numbers (Supply/demand function) and EPS is what are indicators of how bad Intel really is. Most of the indicators are down, way down. So Intel will have to continue to cannibalize itself to keep investors from leaving.
    Reply