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Intel Tumbles After Reporting Lower Server CPU Sales: 8 Key Takeaways

The chip giant reported its server CPU unit's enterprise and government sales fell 47%, more than offsetting higher sales to cloud and telco clients.
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Weaker-than-expected server CPU revenue and margin pressures are leading Intel’s  (INTC) - Get Intel Corporation Report stock to tumble post-earnings for the second quarter in a row.

On Thursday afternoon, the chip giant reported Q3 revenue of $18.33 billion (down 4% annually) and non-GAAP EPS of $1.11. Revenue slightly topped an $18.24 billion FactSet consensus, while EPS was in-line with consensus.

For Q4, Intel guided for revenue of $17.4 billion (down 14% annually) and non-GAAP EPS of $1.10. Those numbers respectively compare with consensus estimates of $17.38 billion and $1.07.

Intel’s stock fell 9.4% in after-hours trading to $48.85, leaving it down 18% on the year. Shares previously plunged in July after Intel disclosed in its Q2 report that the launch schedule for CPUs relying on its next-gen, 7-nanometer (7nm), manufacturing process node is being pushed back by 6 months due to a yield issue.

CPU archrival AMD  (AMD) - Get Advanced Micro Devices Inc. Report, which reports on Tuesday, rose 0.8% after-hours to $80.04. 

Intel’s numbers come after a host of other chip suppliers have delivered strong results/guidance or hiked their Q3 outlooks. Here are some notable takeaways from the company’s earnings report and call.

1. Server CPU Sales Were Weaker Than Expected

Likely weighing on Intel’s stock: Though Q3 revenue slightly beat estimates, the Data Center Group (DCG), which covers sales of server CPUs and various complementary products, saw revenue drop 7% annually to $5.91 billion, missing a $6.21 billion consensus.

Moreover, DCG’s “Platform” revenue, which generally involves CPU sales, was down 11%. This was partly offset by a 34% increase in sales of “adjacency” products, driven by ramping shipments of Intel’s Atom P5900 5G base station SoC.

The main culprit: DCG’s enterprise and government-related sales (pressured by weak enterprise server demand) fell 47% annually, after seeing 30%-plus growth in both Q1 and Q2 amid OEM inventory-building. Sales to cloud service providers rose 15%, following 47% Q2 growth, and sales to communications service providers rose 4%, following 44% Q2 growth.

DCG's Q3 performance. Source: Intel.

DCG's Q3 performance. Source: Intel.

In addition, Intel forecast its total “data-centric” revenue, 70% of which involved DCG in Q3, will be down about 25% annually in Q4. On the call, Intel said DCG’s enterprise/government sales are expected to remain weak and that cloud demand will moderate as “key customers” digest recent purchases, while expressing optimism cloud orders will be healthy in 2021.

2. PC CPU Sales Topped Expectations

Intel’s Client Computing Group (CCG), which covers sales of PC CPUs, PC motherboard chipsets and “adjacency” products such as 4G/5G modems, saw revenue rise 1% to $9.85 billion, topping a $9.09 billion consensus.

Platform revenue (PC CPU-driven) rose 5%, while adjacency fell 18% due to Apple’s decision to use Qualcomm modems for its iPhone 12 line. Notebook-related revenue rose 16% thanks to strong consumer and education-market demand; desktop-related revenue fell 16% thanks to weaker corporate demand.

CCG's Q3 performance. Source: Intel.

CCG's Q3 performance. Source: Intel.

With lower modem sales set to be a bigger headwind, Intel guided for CCG revenue to drop by a low-single digit percentage in Q4. However, that’s better than a consensus for a 15% drop. Sales involving consumer notebooks are expected to remain strong, thanks to both end-market demand and a strong shipment ramp for Intel’s recently-launched, 10nm, Tiger Lake notebook processor line.

3. Gross Margin and ASPs Were Weaker Than Expected

Weighing on Q3 EPS: Intel’s non-GAAP gross margin (GM) was 54.8%, down 5.5 points annually and below guidance of 57%.

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Lower average selling prices (ASPs) were blamed. Server CPU ASP fell 15%, something Intel largely blamed on a mix shift away from enterprise/government sales. Notebook CPU ASP fell 7% due to a mix shift towards low-end consumer/education purchases, and desktop CPU ASP was flat.

As Intel previously signaled, the ramp of 10nm products is also weighing on margins for now. For Q4, Intel expects a 55% non-GAAP GM, which implies a 5-point annual drop.

4. Buybacks and Spending Controls Are Boosting EPS

Intel disclosed that it initiated $10 billion worth of accelerated stock repurchase (ASR) agreements in August. ASR-related purchases led Intel’s diluted share count to drop 2% sequentially in Q3, and should lead it to drop again in Q4.

Along with buybacks, EPS benefited from a 1% annual drop in Intel’s non-GAAP operating expenses to $4.7 billion. On a GAAP basis, R&D spend rose 2% to $3.27 billion, while marketing and G&A spend fell 7% to $1.44 billion.

5. Flash Memory, FPGA and ‘IoT’ Sales Fell, While Mobileye Rebounded

Intel’s Non-Volatile Memory Solutions Group (NSG), much of which is now set to be sold to South Korea’s SK Hynix, saw revenue drop 11% to $1.15 billion. And the Internet of Things Group (IOTG), which covers sales of CPUs and other products going into places such as factories, hospitals and retail stores, fell 33% to $677 million, with Intel blaming both COVID-related headwinds and U.S. sanctions against Chinese clients.

The Programmable Solutions Group, which handles FPGA sales, saw revenue drop 19% to $411 million amid weaker demand from telecom equipment and embedded systems clients. For comparison, FPGA archrival Xilinx  (XLNX) - Get Xilinx Inc. Report reported an 8% annual revenue drop yesterday.

The Mobileye ADAS vision processor unit was a relative bright spot, with revenue rising 2% annually (and 60% sequentially) to $234 million as car production halts ended.

CFO George Davis said Intel expects “continued demand weakness” for NSG and IOTG in Q4, and “continued strong Mobileye growth as design win momentum continues and the automotive industry stabilizes.”

6. The Capex Budget Has Been Cut Again

In July, Intel guided for 2020 capex of $15 billion, down from a $17 billion forecast issued in January. Now, the company is guiding for 2020 capex of $14.2 billion to $14.5 billion.

On the call, Davis said that $300 million of this change is due to a change in how Intel accounts for capital investments involving its NAND flash memory business, thanks to the planned Hynix sale. Thanks in part to this accounting change, Intel is now guiding for 2020 free cash flow of $18 billion to $18.5 billion, up from July guidance of $17.5 billion.

7. Intel Continues Signaling it Will Rely More on Foundries in the Future

After Intel disclosed its 7nm setback in July, CEO Bob Swan suggested a greater portion of Intel’s product line could partly or fully rely on foundries (such as Taiwan Semiconductor  (TSM) - Get Taiwan Semiconductor Manufacturing Company Ltd. Report, which makes AMD's CPUs) for manufacturing, particularly as Intel rolls out more products featuring multiple chips connected via advanced packaging technologies. He doubled down on that stance on the Q3 call.

“Many of our future products can no longer be described as manufactured inside or outside, or as being a large-core or a small-core product,” Swan said. “These products will take advantage of hybrid architectural approaches and the universe of IP deployed both inside and outside the walls of Intel.”

Notably, Swan also said he’s “increasingly confident in the leadership our 2023 products will deliver on either Intel 7-nanometer or external foundry processes, or a combination of both.” He promised to share more during Intel’s January Q4 call.

8. Intel’s Next-Gen Server CPU Line Has Been Delayed Again

Previously, Intel pushed back the start of volume shipments for its Ice Lake Xeon server CPU line -- the first to rely on Intel’s 10nm node -- from the first half of 2020 to Q4. On the Q3 call, Swan said Intel is now “targeting qualification” for Ice Lake server CPUs at the end of Q4, with a volume ramp starting in Q1 2021.

For comparison, AMD, which has already been taking server CPU share in the cloud and supercomputer segments via its Rome Epyc server CPU line (launched in mid-2019), has said it will launch its next-gen Epyc line (codenamed Milan) in Q4.

Swan also indicated that Ice Lake’s successor, known as Sapphire Rapids, will be arriving towards the end of 2021. In its Q2 report, Intel only said that Sapphire Rapids would arrive during the second half of 2021.

Passages in the article mentioning the expected launch dates for Intel's Ice Lake and Sapphire Rapids server CPU lines have been corrected.