Chipmaker dials down 2019 forecast as chip shortages continue and demand for data center products declines
The ongoing processor shortage that stalled the PC market during the holiday season, combined with a slump in data center demand for processors and memory chips, continues to hamper Intel’s outlook. In the earnings report for its second quarter, ending in March, Intel advised that ongoing inventory and market challenges will cause 2019 revenue to decline 3%.
The Lowdown: Intel had been battling to recover from its misjudgments in Xeon and Core processor production in the second half of 2018. While Intel says processor production is up and inventories are recovering, the pace is not enough to keep up with demand. Further, an unexpected slump in demand for data center products — particularly in China, a byproduct of the ongoing trade war — is amplifying the dampening.
The Details: Analysts expect Intel will start to see a recovery from the inventory and demand slump in the second half of 2019. Intel says production of new products, such as its 10-nanometer processor, is increasing and will start producing positive returns after July. Despite the expected recovery, Intel’s 2019 revenue will likely tally $69 billion opposed to the $71 billion previously expected.
The Impact: While Intel suffers from its inventory shortages, hard-hit PC vendors have recovered somewhat by sourcing components from alternative suppliers such as AMD. Analysts expect AMD will benefit from Intel’s ongoing woes, but caution against an all-out breakout that will impact Intel’s market share dominance.
Background: The Intel chip shortage couldn’t have come at a worse time — the all-important holiday shopping season. The chip shortage caused PC sales to plummet in the last three months of 2018 as vendors couldn’t fulfill consumer and commercial demand. Analysts expected a recovery in the first quarter of 2019, driven largely by the Microsoft Windows 7 end of life. PC sales continue to decline, though, as the Windows 7 replacement cycle is stretched out and processor inventory hasn’t fully recovered.
“Our supply constraints have had a disruptive impact on our customers and ecosystem,” said Intel CEO Bob Swan. “We’ve committed never again to be a constraint on our customers’ growth. We’ve increased capacity to improve our position in the second half, although product mix will continue to be a challenge in the third quarter as our teams align available supply with customer demand.”
“Server CPU unit shipments are now expected to be lower for 2019 than management estimated in January,” wrote Stifel analyst Kevin Cassidy. “While enterprise and government demand is lower, management pointed to Chinese cloud server providers as carrying high inventory. … At issue is lower server CPU revenue, which weighs on profitability for the year, [plus] AMD [has] more of an opportunity to compete for market share as their products are generally lower cost.”
Other analyst perspectives:
“The environment is worse than our below-consensus numbers, as industry conditions are tough — and we remain cautious on the group,” wrote Morgan Stanley analyst Joseph Moore. “Revenues were driven lower by data center weakness, as China headwinds and customer inventory digestion added to the softness.”
“Cyclical headwinds persist. [Intel] reduced its 2Q and 2019 guidance based on macro dynamics (inventory burn, China, NAND pricing, etc.) which once again impacted [Intel’s] guidance,” wrote Deutsche Bank analyst Ross Seymore. “Still, Intel has a number of company-specific drivers that can bolster a still required improved macro environment, including new 10nm/14nm PC supply, a wide array of new product launches (Ice Lake, Cascade Lake, Snow Ridge, etc.), and a full year of higher modem share.”
“With a weaker start to the year, especially in 2Q, where data center spending remains weak (primarily in China), Intel lowered its 2019 revenue view from $71.5B to $69.0B,” wrote JPMorgan analyst Harlan Sur. “While investors may be skeptical, the [Intel] team’s visibility toward 2H inflections is improving with inventory in China being consumed, hyperscale cloud spending build plans becoming clearer and supported by a strong upgrade cycle of Cascade Lake product.”