Intel's Record Performance in 2018 and Revised Outlook for 2019

Table of Contents:

1. Introduction
2. Intel's Record Performance in 2018
3. Expanding to Become a Data-Centric Company
4. Capitalizing on AI with Second-Generation Xeon Scalable Processor
5. Transforming the Mobile Eye Business
6. Focus on 5G Network Infrastructure and Edge Computing
7. Accelerating Innovation with Broad Range of Products and Technologies
8. Introduction of United States' First Exascale Supercomputer
9. Advancements in the PC-Centric Business
10. Improving Execution and Concentrating Resources
11. Revised Outlook for 2019
12. Gross Margin Miss and Impact of 10nm Yield Curve
13. Strategic Development of Discrete GPUs
14. Strategic Assessment of Memory Business
15. Progress on 10nm and Future Competition in the Server Market
16. Performance of Intel's 5G Network Connectivity
17. Impact of 5G on Data Centric Segment Growth
18. Expansion of Intel's GPU Product Line
19. Discussion on 10nm Progress and Future Gross Margins
20. Conclusion

🖥️ Intel's Record Performance in 2018

Intel Corporation, a leading technology company, announced their first-quarter earnings for 2019 in a conference call. The call was hosted by Mark Kenney, Head of Investor Relations, and featured presentations by Bob Swan (Interim CEO and CFO), Murthy Renduchintala (Group President of Technology, Systems Architecture, and Client Group), and Naveen Shenoy (Executive Vice President and General Manager of the Data Center Group). The call began with an introduction from Mark Kenney, thanking everyone for joining and providing an overview of the call agenda. He then introduced Bob Swan, who shared insights on Intel's performance in the first quarter and revised expectations for the full year.

Bob Swan started by acknowledging Intel's record-breaking performance in 2018, with their top-line results coming in higher than expected. He Mentioned that Intel aims to transition from being a PC-centric company to a data-centric company and capitalize on key technology inflections that enable them to play a larger role in their customers' success. Swan highlighted the significant progress made in expanding their time, accelerating innovation, and improving execution while evolving their culture.

📈 Expanding to Become a Data-Centric Company

One of the primary focuses for Intel is expanding their business to become data-centric rather than solely PC-centric. Swan emphasized their ambitions to identify and capitalize on key technology inflections that position them to play a larger role in their customers' success. He highlighted their first-ever data-centric portfolio launch, a significant milestone in their efforts to capitalize on the AI opportunity. This launch included the second-generation Xeon Scalable processor, which stands out as the only processor in the industry with built-in artificial intelligence acceleration. Swan highlighted the remarkable performance improvement and mentioned that the CPU performance beats GPU performance on major AI workloads.

Intel has also been making strides in their collaboration with Siemens on breakthrough AI-based cardiac MRI models. The DL boost technology Present in their newest Xeon Scalable processors has the potential to provide real-time diagnosis using this model. Another area where Intel is gaining traction is the Mobileye business, with eight new global ADAS designs in the first quarter alone. Their real-time crowd-sourced mapping technology, called REM, is also gaining Momentum.

⚡ Accelerating Innovation with a Broad Range of Products and Technologies

To compete effectively in the data-centric era, Intel believes that a broad range of products and technologies is essential. Swan outlined their investment in six critical pillars of innovation, including process technology, architecture, memory, interconnect, security features, and software. He highlighted some notable examples, such as their efforts to architect the United States' first exascale supercomputer, called Aurora, for the Department of Energy's Argonne National Laboratory. This supercomputer will leverage Intel's technologies designed for the convergence of artificial intelligence and high-performance computing.

Swan also mentioned their focus on accelerating innovation in the PC-centric business. Their team is working closely with OEM customers to define and deliver a new class of next-generation laptops, known as Project Athena. Additionally, Intel recently launched the most powerful generation of Intel Core mobile processors designed for gamers and content creators.

💡 Improving Execution and Concentrating Resources

Swan highlighted the importance of improving execution and evolving Intel's culture by concentrating resources on the vital few programs that have a significant impact on customer success and return on investment. Intel aims to execute better on the most critical programs, rather than spreading themselves thin across numerous initiatives. Swan mentioned that this approach has already resulted in exiting non-strategic businesses and reducing spending as a percentage of revenue.

One area where Intel recognizes the need for improved execution is meeting customer demands and delivering on their highly awaited 10nm lineup of products. Swan acknowledged the disruptive impact of supply constraints on customers and the ecosystem. However, he expressed confidence in improving supply in the second half of the year. Intel also plans to qualify their first volume 10nm product, Ice Lake, in the second quarter and increase their 10nm volume goals for the year.

📉 Revised Outlook for 2019

Swan proceeded to provide an updated outlook for the full year of 2019. He mentioned a revision of expectations due to challenging market trends and customer conversations. Despite the record-breaking 2018 results, Swan acknowledged underlying concerns and revised Intel's full-year revenue outlook to $69 billion, down 3% year-over-year. He attributed this revision to factors such as data center inventory and capacity digestion, continued weakness in China, and an increasingly challenging NAND pricing environment.

Intel's PC-centric business outlook remains unchanged, with expectations of low single-digit growth. However, the data-centric business is expected to decline in the low single digits year-over-year. Swan also revised the operating margin forecast to approximately 32%, down 3 points year-over-year. The revised outlook reflects lower revenue and a decline in gross margin due to the 10nm ramp, pricing pressures, and increased spending efficiencies.

🎯 Gross Margin Miss and Impact of 10nm Yield Curve

Intel's gross margin miss in the first quarter was influenced by several factors. Swan explained that the planned ramp-up of their 10nm production process, which is vital for future products, contributed to the compression of gross margins. Until the 10nm products qualify, all associated costs flow through the cost of sales, resulting in margin pressure during the early stages of the ramp.

Additionally, Intel faced unexpected challenges in the NAND market, with ASP declines greater than anticipated. As a result, they took a lower cost or market reserve against their inventory balance, impacting gross margins. Swan emphasized that these dynamics were not entirely foreseen but highlighted the progress made on 10nm yields, which gives them confidence in improving margins as volume manufacturing and better yield performance are achieved.

🔮 Strategic Development of Discrete GPUs

In their pursuit of innovation, Intel is set to invest in the development of discrete graphics processing units (GPUs). Swan mentioned that their objective is to leverage their existing architectural technology, such as integrated GPUs, and launch new discrete GPUs in both client and data center segments.

The decision to invest in discrete GPUs Stems from Intel's belief that architectures beyond CPUs, including GPUs, FPGAs, and AI accelerators, are crucial for satisfying the growth of AI and Parallel processing workloads. Intel intends to become a major player in the GPU market, recognizing its increasing importance for a data-centric world. While they plan to launch the new integrated GPU in the near term, the discrete GPUs are anticipated for release in 2020.

⚙️ Strategic Assessment of Memory Business

Bob Swan addressed concerns regarding Intel's memory business, specifically their focus on NAND flash memory. Swan outlined Intel's criteria for pursuing various technologies and acknowledged that their NAND business faces profitability challenges due to significant pricing pressures. Intel is striving to improve execution in this business segment and generate more attractive returns. While they explore partnerships to accelerate growth, they remain committed to delivering differentiated products and technologies in the memory space.

💻 Progress on 10nm and Future Competition in the Server Market

Intel's progress on 10nm, especially in the server market, is a topic of interest. Swan announced that client systems will be available for the holiday season, with server CPUs set to follow in 2020. Intel aims to fast track their server product launch after the client launch, anticipating a shorter gap between the two compared to previous generations.

Swan also addressed the impact of future competition in the server market. He believes that Intel's Cascade Lake product, launched just a few weeks ago, positions them competitively despite increased competitive environments. Furthermore, they are confident that their 10nm server CPUs, along with their deep domain knowledge of customers' needs, will allow them to maintain a strong position in the second half of the year.

🌐 Performance of Intel's 5G Network Connectivity

Intel's 5G network connectivity business is experiencing strong growth and is projected to continue accelerating. Swan emphasized their strong product lineup, including 5G-ready FPGAs and base stations, which position them well in this lucrative market. However, the contribution from the common service provider segment in the first quarter was weaker than expected due to a digestion period and slower demand, especially in China. Swan expressed optimism for an improvement in the second half as 5G demand picks up and relationships with customers strengthen.

🎉 Conclusion

In summary, Intel's first-quarter earnings conference call provided valuable insights into their performance, strategic priorities, and revised outlook for 2019. Despite facing challenges, such as the 10nm ramp and competitive pressures, Intel remains committed to expanding its presence as a data-centric company. With their focus on accelerating innovation, improving execution, and concentrating resources, Intel aims to capitalize on key technology inflections and deliver leadership products across diverse workloads. They are well-positioned for future growth in the 5G network infrastructure, AI, and GPU markets. While cautious about certain market trends and the impact on revenue and margins, Intel continues to invest in critical technologies and drive innovation in the data-centric era.