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Intel's Profits Propelled 40% by Demand in Cloud Data Centers

May 6, 2020
Intel said sales of its server processors would remain robust in the second quarter of 2020 as more businesses look to keep workforces running remotely by renting out services over the cloud. But it faces more uncertainty in the second half of the year.

Intel reported a sharp jump in quarterly profit and sales, buoyed by booming demand for server chips designed for data centers and base stations as the impact of the coronavirus forces more businesses to rent services over the cloud and mandate remote work for employees. But the company also warned that the virus could threaten its earnings in the future, signaling the boom in business may not last.  

Intel's sales soared by more than 20% to $19.8 billion in the first quarter of 2020, driven by demand for chips used in the data centers of major cloud vendors that rent out computing resources to businesses, ranging from Microsoft, Amazon and Google to Tencent, Baidu and Alibaba in China. Intel also profited from a bump in its personal computer business as consumers resorted to working remotely as lockdowns are imposed to impede the virus.

Intel's sales of computer chips used in corporate data centers and cloud servers improved by more than 40% to $7 billion in the first quarter of 2020, up from $4.9 billion in the first quarter of 2019. The personal computer business came out to $9.8 billion, as it improved its supply of chips over the last quarter. Intel reported net profits of $5.7 billion, or $1.31 per share, compared to $4.1 billion, or 85 cents per share, in the first quarter of the year.

Intel, which has been granted essential status for most of its production plants around the world, said that it has resolved the worst of the unforeseen disturbances in its operations. Intel has maintained its production as the deadly illness leads to lockdowns in the United States, Southeast Asia and China, while protecting the health and safety of its employees. The lockdowns are also threatening unforeseen delays in the global supply of chips.

The Santa Clara, California-based company said that because of the "significant economic uncertainty" resulting from the crisis, it was withdrawing its sales forecast for the full year. Intel is grappling with the prospect of a prolonged fight against the lethal pathogen, which could compound the economic damage and dent demand for chips. Intel is also boosting its balance sheet, pausing share buybacks, and delaying spending to brace for the fallout.

The company warned its profits would be $1.04 per share in the second quarter of 2020, slightly ahead of $1.06 per share of profits in the second quarter of 2019, signaling that it could be dragged by fading demand for personal computers and cooling spending on data centers, which could blight its business in the second half of 2020. Intel said sales should be $18.5 billion in the latest quarter, up from $16.5 billion in the second quarter of 2019.

Intel commands more than 90% of the market for chips designed for use in data centers, which tend to cost thousands to tens of thousands of dollars each. That could cushion it from the worst of the economic uncertainty. Intel's sales of server chips used in cloud data centers improved by 53% as customers raced to upgrade data centers as more businesses rented out resources over the cloud, a steeper increase than the fourth quarter last year. The average selling price of these types of chips leaped by 13%.

The booming data center business buoyed Intel's sales of other components crammed in servers, including 3D NAND and 3D Xpoint memory chips. The company's overall sales of memory chips improved by more than 45% year over year to $1.34 billion. 

Intel's sales of wireless networking chips leaped more than 30% as customers rolled out 5G networks. Intel has started supplying 10-nanometer chips for 5G infrastructure, code named Snow Ridge, to major 5G vendors including Nokia and Ericsson. Intel is looking to become the world's largest vendor of 5G base station silicon. The company said it plans to steal 40% of the global market by 2021, a year ahead of the company's previous estimate. 

George Davis, Intel's chief financial officer, said its soaring sales of server processor would continue into the second quarter as more services are outsourced to the cloud and more businesses are looking to keep large workforces running remotely. He said sales should continue to grow in the personal computer business in the first half of the year. But he confessed the company's forecast for the second half of the year is more unpredictable. 

The Silicon Valley giant is also facing uncertainty over whether demand for chips used in cloud servers and data centers is set to continue in the second half of the year. Personal computer sales could also slump as the global economy falls apart and consumers delay buying or upgrading the products. "The second half demand picture is more uncertain," said Bob Swan, Intel's chief executive officer, on an analyst conference call last month.

"The environment is uncertain but our priorities are unwavering," he said.

Intel plans to roll out its latest line of chips based on 10-nanometers, code named Tiger Lake, to leading manufacturers of personal computers late in the first half or early in the second half of the year. Intel also plans to start selling its latest generation of server chips based on 10-nanometers, code named Ice Lake, by the end of 2020. Intel's current line of server chips is based on its 14-nanometer node and Cascade Lake microarchitecture.

Intel is also struggling to combat shortages in its supply of personal computer chips, which has hampered top manufacturers and stopped it from taking advantage of spikes in demand. The company said that it had replenished its supply in the first quarter, rebuilding some inventory and keeping up with more of the demand. Intel also battled through delays caused by factory closures and steep labor shortages in China early in the first quarter.

The company said gross margins improved to 60.6% in the first quarter of 2020, up from 56.6% a year ago, driven by demand for chips installed in data centers. Intel's profit margins are projected to be 56% in the second quarter as it grapples with the high cost of rolling out more advanced chips based on its 10-nanometer node, including Tiger Lake and Ice Lake CPUs and its latest generation of Snow Ridge SoCs for 5G networks.

Delays in the development of chips based on 10-nanometers have haunted Intel in recent years. AMD has leaped ahead with chips based on the world's most advanced production process, the 7-nanometer node, from TSMC. AMD plans to take double-digit market share in data centers by the end of the year with its line of Eypc CPUs based on 7-nanometers. It is also releasing its latest line 7-nanometer Ryzen CPUs to strike Intel's stronghold in PCs.

Intel is also gritting its teeth for more uncertainty ahead. The company, which amassed $2.9 billion in cash over the last quarter, plans to cancel share buybacks during the crisis, which has burned through the global economy and cast a pall of uncertainty over the chip business. Intel has also raised $10.3 billion of debt to cushion the blow to its business in what could be the steepest slowdown since the financial crisis more than a decade ago. 

The worsening uncertainty also forced it to reduce capital spending in 2020. Intel pulled plans to spend $17 billion in capital investments in 2020, up from $16 billion in 2019 and $15.2 billion in 2018, the company said. Davis, Intel's chief financial officer, said it expects to push out more than a month of spending because shutdowns in some countries where it operates have halted major construction projects. The spending will be delayed to 2021.

Swan, who served as Intel's chief financial officer before he was promoted last year, said that it will continue to carry out "medium-to-long term" capital investments despite the uncertainty. Intel plans to invest billions of dollars to bring the 10-nanometer process to more production plants in 2020. Intelis also trying to roll out chips based on the more advanced 7-nanometer node by the fourth quarter of 2021 and 5-nanometers in 2023. 

"We're going to invest to position ourselves to capitalize on the current disruptions that we're wrestling with," Swan said.

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