In January, Robert Swan warned that Intel's sales would only increase one percent in 2019 amid plummeting prices for memory chips, slowing sales to data centers and the flagging Chinese economy, its slowest growth rate in half a decade. But Intel's CEO changed his tune when the Silicon Valley company reported its first quarter results last week: things are going to be worse than it thought.
Intel, the largest supplier of chips used in personal computers and data centers, shaved $2.5 billion from its 2019 fiscal year forecast of $71.5 billion. The company said its sales would be $69 billion in 2019, down from $70.8 billion in 2018. Intel's struggles have already started, according to chief financial officer George Davis. Sales came to $16.1 billion in the first quarter, unchanged over the last year. Profit declined 11% to $4 billion.
Intel still makes most of its money—$8.6 billion in the first quarter of 2019—from selling chips used in personal computers. But the company increasingly depends on its data center sales to sustain its growth. Intel has also doubled down on its cloud computing customers, which have to build bigger and bigger data centers to support all the corporations moving to the cloud. Intel currently holds more than 95% market share in server chips.
But major cloud computing firms, including Google, Amazon and Microsoft, among others, have started to slash orders for Intel's Xeons, dampening its robust growth in data centers. They are trying to get through the inventory they already have before restarting spending. Intel's cloud sales have dropped from 50% in the third quarter of 2018 to 5% in the first quarter of 2019. Its data center sales dropped 6% to $4.9 billion in the first quarter.
Intel is grappling with other pressing issues. The company has been delayed in delivering chips based on 10-nanometers, erasing its technology lead. Swan said that the company plans to start shipping its first 10-nanometer processor, Icelake, by the end of 2019. The company has also struggled to meet customer demand for its 14-nanometer chips used in personal computers. That has opened the door for AMD to steal market share.
"Looking ahead, we're taking a more cautious view of the year, although we expect market conditions to improve in the second half," Swan said. Intel estimated second quarter sales of $15.6 billion on earnings of $0.83 per share, down from the second quarter last year by 8% and 14%, respectively. Intel is also trying to more aggressively control costs: spending as a percentage of sales has dropped from 32.4% to 30.3% over the last year.