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Intel's latest manufacturing delay takes the strong profit out of sight



During a week in which Facebook (FB), Alphabet / Google (GOOGL), Microsoft (MSFT) and, to a lesser extent, Amazon.com (AMZN) revealed strong investments and growth plans, Intel (INTC) has made it clear that it profited greatly from this data center vengeance.

Unfortunately, the chip giant soon followed suit by uncovering a new production delay that raised concerns about execution and could make life easier for data center rivals

On Thursday afternoon, Intel reported a strong increase in revenue / EPS in the first Q3, announced a more than consensus Q2 forecast, and increased its full-year revenue guidance by $ 2.5 to $ 66.5-68.5 billion). The company has also increased its investment budget for 201

8 by $ 500 million to between $ 14 billion and $ 15 billion.

Contribution to Intel's first-quarter revenue: The company's Data Center Group (DCG) delivers server CPUs and a variety of complementary products, revenue grew 24% to $ 5.2 billion annually, outstripping one Consensus of 4.9 billion USD. The growth of the DCG was driven in large part by an increase in sales to cloud service providers by 45% (better than Q4 35%) and a 33% increase in telecoms service revenues (driven by investments in network function virtualization and telco cloud services). Platforms).

Intel also benefited from a 3% increase in Client Computing Group (CCG) sales, exceeding expectations for a 2% decline. While weak PC demand for PCs and AMD's (AMD) Desktop CPU shares weighed on CCG, higher average selling prices (ASPs) and improved PC demand boosted business. In addition, Intel's IoT, flash memory and programmable chip (FPGA) product segments each grew 17% to 20%, with the programmable chip unit benefiting from a 150% increase in data center revenue (Microsoft and Baidu (BIDU)) on Intel FPGAs to provide AI-powered services.

All of this was good enough to initially increase Intel's stock by more than 7% in profit. But stocks slipped their profits as the company talked about its earnings call. And after opening 4.5% on Friday morning, they gradually sold off and fell slightly in the late afternoon.

The biggest culprit behind the sale: CEO Brian Krzanich stated on demand that Intel has pushed back its ETA for mass production of chips, based on the 10-nanometer (10nm) next generation manufacturing process starting in the second half of 2018 Support 2019 (just when 2019 was not shared). Krzanich accused a slower than expected improvement in 10nm manufacturing yields and promised that the situation would not recur with the 7nm process following the 10nm process (2020 or 2021).

This is a long way from Intel's first 10nm delay. At one time, Intel was expected to ramp up 10nm production in the second half of 2016. The company then pushed its schedule into the second half of 2017, before later forecasting a 2018 ramp.

Provided there are no delays, Intel's new production schedule means that between the time the production of the first 14nm CPUs went into operation, and the time in which the first 10nm CPUs did be completed, about five years have passed. As a result, the company has unparalleled four different CPU platforms deployed on 14nm processes (Broadwell, Skylake, Kaby Lake and Coffee Lake) and will launch a fifth (Whiskey Lake) later this year.

For comparison, prior to 14nm, Intel typically only launched two CPU platforms per manufacturing process node – its historical tick-to-stick approach. In 2016, the company announced (referring to the slowdown in Moore's Law) that it was switching to a tick-and-go Tock design cadence in which it would launch three platforms per node. But clearly what Intel is doing at 14nm goes far beyond that.

In a sense, Intel's tech teams have done a good job of getting the most out of a bad situation: The solid performance gains Intel's recently-launched 8th place has achieved. The core PC CPUs from Gen, which use both Kaby Lake as well as coffee-lake chips are available for this purpose. But it's hard to ignore the extent to which Intel's 10nm delays have served to diminish its once-great lead in the manufacturing process.

Last year, Taiwan Semiconductor (TSM) and Samsung have increased the production of 10nm processes to approximately 14nm processes. Some of the company's major customers, including Apple (AAPL), Qualcomm (QCOM) and MediaTek, have released 10nm chips.

And in the second half of 2018, TSMC will accelerate the production of a 7nm process as equated to Intel's 10nm process. Apple's A-Series system-on-chips (SoCs), which will power this year's iPhones, are expected to benefit. TSMC competitors Samsung (SSNLF) and Globalfoundries are expected to see 7nm ramps in 2019.

With its recent delay, Intel's decade-long lead in component manufacturing seems to have completely disappeared. It's possible that Intel could regain a lead if it goes well with its 7nm ramp. But by then, rivals will come at least at the level of manufacturing, and perhaps even in some cases, even further.

This affects a number of markets. AMD, which relies on both Globalfoundries and TSMC, plans to scan 7nm CPUs and GPUs before 2019 product launches by the end of 2018. Qualcomm has announced plans to launch a Samsung 7nm 5G modem In early 2019, TSMC's 7 nm process will bring a next-gen processor (the Snapdragon 855) to market. Xilinx (XLNX), Intel's FPGA Archival and a The TSMC client plans to roll out 7nm chips next year based on its innovative ACAP platform.

One must also wonder whether Intel 10nm delays, along with the company's plans to use future manufacturing processes with data center products instead of PC CPUs, have something to do with Apple's reported plans, self-developed processors within Macs as early as 2020 to use. By 2020, Apple's partner TSMC plans to manufacture chips in a 5nm process that could compete with Intel's 7nm process.

Just as many IBM (IBM) investors have lost patience with the company's turnaround efforts, it seems that some Intel investors are no longer prepared to give the company the benefit of doubt over its manufacturing problems. And while these problems do not lead to the demise of the company, it is not difficult to see that they have a high price starting in 2019.

Jim Cramer and the AAP team hold positions in Apple, Facebook and Microsoft, Amazon and Alphabet for their Action Alerts PLUS Charitable Trust Portfolio . Would you like to be warned before Cramer buys or sells AAPL, FB, MSFT, AMZN or GOOGL? Learn more now .


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