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Intel's Profits Jump 42 Percent in Third Quarter

From the 10-nanometer manufacturing glitches and the looming threat of losing market share to Advanced Micro Devices to the resignation of former chief executive Brian Krzanich and the recent shortages of chips based on 14-nanometer technology—nothing seems to slow Intel down. That came through on Thursday when the Santa Clara, California-based company reported third quarter earnings.

Revenues were $19.2 billion in the third quarter, an increase of 19 percent since the same quarter last year. Operating profit jumped 42 percent to $6.4 billion. With revenue growing faster than costs, Intel’s gross margins improved to 64.5 percent, up from 62.3 percent in the previous third quarter as Intel took advantage of rising demand—and prices—for 14-nanometer Core and Xeon processors.

Data center revenue jumped 26 percent over the last year to $6.1 billion, while the unit’s operating margins have increased from 46 percent to 50 percent since the previous third quarter. Operating income for the data center business ramped up from $2.3 billion to $3.1 billion. Intel’s cloud business increased 50 percent, while wireless networking sales went up 30 percent as 5G networks are developed.

Personal computer sales also increased 16 percent since the third quarter last year to $10.2 billion, the second straight quarter that Intel has profited from the long stagnant sector. Many businesses have started upgrading their computers partly because Microsoft said that it would end support for older versions of the Windows operating system in 2020. Lower graphics chip prices are also boosting sales, according to IDC.

“Stronger than expected customer demand across our personal computer and data-centric businesses continued in the third quarter,” said Robert Swan, Intel’s chief financial officer, who has taken over as chief executive while a permanent replacement is found. “This drove record revenue and another raise to our full-year outlook, which is now up more than six billion dollars from our January expectations.”

Intel has largely avoided the slowdown that affected Texas Instruments in the third quarter. The Dallas, Texas-based company’s results are used as a thermometer for the semiconductor industry since it builds chips used inside tens of thousands of different electronic devices. Shares of Texas Instruments have cooled over the last month amid concerns that the recent resurgence in semiconductors has ended.

Operating expenses as a percentage of revenue dropped from 36 percent to 29 percent during the quarter despite higher capital expenditures. Intel recently reserved an added $1 billion in capital to boost production of personal computer chips in short supply. The shortage could last into the second half of 2019, analysts say. Intel's capital expenditures are projected to be around $15.5 billion in 2018—$1.5 billion more than Intel anticipated at the start of the year.

“We were caught off guard a little bit this year by explosive growth well ahead of what our expectations were back in the beginning of the year,” Swan said on Thursday’s conference call with analysts. “That growth came from all different segments of the business. It put us in the unfortunate situation of constraining some of the demand we were seeing from the market and our customer base.”

The company also took a $290 million charge after Micron Technology announced that it would buy out Intel’s share in IM Flash Technologies, which handles the production of 3D XPoint memory. As part of the deal, Intel said that it would have a guaranteed supply of wafers from Micron through 2020. The company also said that it would consider building its own manufacturing lines for 3D XPoint, which shipped inside Intel’s first Optane Persistent Memory products in the third quarter.

Intel’s modem business also jumped 131 percent in the third quarter after Apple went with Intel’s modems instead of Qualcomm’s in all the latest iPhones. The Internet of Things business unit added around 19 percent more business annually, excluding the second-quarter sale of embedded software supplier Wind River Systems. The memory business improved 21 percent over the last year to $1.1 billion of revenue.

Programmable solutions revenue increased slightly since the previous third quarter to $496 million, though operating profit slipped to $106 million. But sales of advanced products based on 28-nanometer, 20-nanometer and 14-nanometer technology jumped 55 percent over the last year. Last quarter, the business unit, which develops field-programmable gate arrays (FPGAs), moved into the market for application specific integrated circuits (ASICs).

Intel forecasted fourth-quarter revenue of around $19 billion but warned that its current manufacturing output may fall short of demand. The company has shifted 10-nanometer production to cover shortages of chips based on 14-nanometer technology, Swan said. The company’s earnings are projected to be $1.22 per share, while operating margins are forecast to decline slightly to 34.5 percent.

Chief engineering officer Venkata Renduchintala said that Intel would still have chips based on 10-nanometer technology available before the end of 2019. “The progress we've made in the quarter is very much in line with our expectations. While we can't give any specific numbers, I do believe that the yields as we speak now are tracking roughly in line with what we experienced in 14-nanometer,” Renduchintala said.

Intel also downplayed concerns that the trade conflict between the United States and China would hamper the global semiconductor industry. While most semiconductors imported into the United States are actually made in America. But they are usually exported to assembly, testing, and packaging companies based in China. Some semiconductor companies have warned that they could start paying tariffs on their own products as a result.

Intel’s results contrasted with AMD’s. On Wednesday, the company reported that its revenues had only increased from $1.58 billion to $1.65 billion over the last year, though its operating margins rose from 36 percent to 40 percent. The company, which has been gaining ground in the server processor market with customers like Oracle, reported that its business was tempered by lower sales of graphics processing units (GPUs).

“In a highly competitive market, customers continue to choose Intel,” Swan said on the conference call with analysts.

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