During a week in which Facebook (FB), Alphabet / Google (GOOGL), Microsoft (MSFT) and, to a lesser extent, Amazon.com (AMZN) revealed strong growth in capital spending and plans, Intel ( INTC) did it It is clear that it is benefiting from this arms race in the data center.
Unfortunately, the chip giant went on to reveal a new manufacturing delay that raises concerns about execution and could make life easier for rivals in the data center and elsewhere.
On Thursday afternoon, Intel announced a strong sales / EPS rate in the first quarter, issued a Q2 recommendation above consensus and increased its sales guidance by $ 2.5 billion to $ 66.5 billion to $ 68.5 billion (implies a 7% growth at the midpoint). The company also increased its 2018 capital expenditures budget by $ 500 million, to a range of $ 14 billion to $ 15 billion.
Contributing to the pace of Intel's first quarter sales: the company's Data Center Group (DCG), which supplies server CPUs and a large number of complementary products, revenues increased 24% annually to $ 5.2 billion, surpassing a consensus of $ 4.9 billion. DCG's growth was driven in large part by a 45% increase in sales to cloud service providers (better than Q4 of 35%) and 33% in sales to telecommunications service providers (driven by investments in virtualization of network functions and telecommunications cloud platforms).
Intel also benefited from a 3% increase in sales of the Client Computing Group (CCG), which exceeded expectations of a 2% drop. Although demand for slow consumer PCs and AMD desktop CPU share (AMD) revenues weighed on CCG, higher average sales prices (ASP) and improved business PC demand provided a boost. In addition, IoT product segments, flash memory and programmable chip (FPGA) from Intel grew between 17% and 20%, and the programmable chip unit benefited from an increase of more than 150% in data center sales ( Microsoft and Baidu (BIDU) trust in Intel FPGAs to offer services powered by artificial intelligence).
All this was good enough to allow Intel shares to initially rise more than 7% after earnings. But the shares reduced their profits while the company talked about purchases in their earnings call. And after opening 4.5% on Friday morning, they gradually sold out and fell slightly at the end of the afternoon.
The biggest culprit behind the sale: CEO Brian Krzanich stated in the call that Intel has delayed its ETA for volume production of chips that depend on its 10-nanometer (10 nm) new generation manufacturing process from the second half of 2018 to 2019 (exactly when in 2019 it was not shared). Krzanich blamed a slower than expected improvement in 10nm manufacturing yields, and promised that the situation would not be repeated with the 7nm process happening to the 10nm process (it could arrive in 2020 or 2021).
This is far from Intel's first 10nm delay. At one point, Intel was expected to increase 10nm production in the second half of 2016. Then, the company delayed its schedule until the second half of 2017, before forecasting a ramp in 2018.
Assuming there is no more delays, Intel the new manufacturing schedule means that it will have been about five years between the time you increased the production of your first 14nm CPUs and the time it does for your first 10nm CPUs. As a result, the company has deployed four unprecedented different CPU platforms that depend on the 14nm processes (Broadwell, Skylake, Kaby Lake and Coffee Lake), and is ready to launch a fifth (Whiskey Lake) later this year.
For By comparison, before 14 nm, Intel typically released only two CPU platforms per manufacturing process node: its historical tick-tock approach. In 2016, the company announced (citing the slowdown in Moore's Law) that it was changing to a tic-tac-tac design cadence in which it would launch three platforms per node. But clearly, what Intel is doing at 14nm goes way beyond that.
Somehow, Intel's engineering teams have done a good job of getting the best out of a bad situation: the solid performance gains delivered by the recently released 8th of Intel Core's Core CPUs, which include Kaby Lake and Coffee Lake chips are a testament to that. But it's hard to ignore the extent to which Intel's 10nm delays have served to weaken its leadership in the manufacturing process.
Last year, Taiwan Semiconductor (TSM) and Samsung accelerated the production of 10nm processes along with the 14n of Intel processes. Several of the companies' main customers, including Apple (AAPL), Qualcomm (QCOM) and MediaTek, have launched 10nm chips.
And in the second half of 2018, TSMC will accelerate the production of a 7nm process that is seen as being on par with Intel's 10nm process. It is expected that Apple-A-series system-on-chips (SoCs), which drives this year's iPhones, will use it. For their parts, rival TSMC Samsung (SSNLF) and Globalfoundries are expected to see 7nm ramps in 2019.
Translation: With its latest delay, the lead of Intel's decades-long manufacturing process seems to have completely disappeared. It is possible that Intel will eventually regain an advantage if it runs well with its 7nm ramp. But until then, the rivals will at least maintain balance when it comes to manufacturing, and maybe in some cases a little later.
This has implications in a number of markets. AMD, which relies on both Globalfoundries and TSMC, plans to start sampling 7nm CPUs and GPUs by the end of 2018 before the 2019 product launches. Qualcomm has announced plans to launch a 5nm 7nm modem that will be manufactured by Samsung, and will use the TSMC 7nm process to launch a next-generation processor (the Snapdragon 855) in early 2019. Xilinx (XLNX), Intel's arch-rival FPGA and TSMC client plans to launch 7nm chips next year based on its innovative ACAP platform.
One must also wonder if Intel's 10nm delays, along with the company's plans to make use of future manufacturing processes with data center products instead of PCs. The CPUs have something to do with the plans of Apple to use proprietary processors within the Mac by 2020. By 2020, Apple's partner, TSMC, plans to manufacture chips using a 5nm process that could be competitive with Intel's 7n process.
Like many IBM (IBM) investors seem to have exhausted patience with the company's response efforts, it seems that some Intel investors are no longer willing to give the company the benefit of the doubt with regarding its manufacture. g problems. And although these problems do not mean the ruin of the company, it is not difficult to see them passing bill in its top line from 2019.
Jim Cramer and the AAP team occupy positions in Apple, Facebook, Microsoft, Amazon and Alphabet for his Action Alerts PLUS Charitable Trust Portfolio . Do you want to receive an alert before Cramer buys or sells AAPL, FB, MSFT, AMZN or GOOGL? Get more information now .