Gloomy prospects for Israel's biggest high-tech employer

Intel building  Photo: Ronen Zvulun, Reuters

The difficulties that Intel is experiencing could push the company into investing more in its Israeli R&D operations.

Intel's share price slid 9% late last week, following disappointing guidance, thereby erasing all of its gains over the past year. The company predicted a fall in revenue for the first time since 2015. In addition to the gloomy guidance, the market was also responding to the challenges facing the company and its difficulty in coping with them. While Intel's revenue shot up 18% in 2018, the company projects a 1% fall in revenue in 2019. Investors are now asking themselves whether the company's strong performance in 2018 was a one-time event.

Intel CEO Robert Swan said, "The talks we held in recent months with our customers and partners in the PC and data centers sectors made several trends clear to us. The downtrend in memory prices accelerated, and the limitations in the absorption capability of inventory in the data centers sector that we presented in January were worse than we expected. The counter-wind from China has become stronger, and has made for a more cautious environment for IT spending."

The decline in Intel's share price shows that the market responded sharply not only because of the emerging downturn in sales, but also in response to a series of events that do not augur well for the company. The market responded late to these events while Intel's share price climbed to an all-time high (except for the 1999 boom).

1. A lagging growth engine

In recent years, Intel's data centers division was a growth engine for the company, following the growing popularity of cloud-based services. This activity stood out in contrast to the global slowdown in PC sales. Already in the fourth quarter of 2018, however, alarming signs appeared in the data centers sector. Revenue from this activity was up only 9% in comparison with the corresponding quarter in 2017, compared with 22% growth in the third quarter and 26% growth in the second quarter. The negative trend continued in the first quarter of 2019, in which data centers revenue was down 5%.

In the talks with analysts following the publication of Intel's previous results, the company attributed the slowdown to lower sales in China, after customers there bought chips earlier than usually because of concern about trade tension between the US and China. US customers, on the other hand, continued buying chips according to their usual pattern.

Swan, however, who was recently appointed Intel's CEO, repeated this explanation late last week. He said that Intel was coping with the consequences of increased growth in 2018, which resulted in customers having surplus inventories of unused components. Swan stated that the recovery would take longer than expected. Actually, it can be assumed that the good quarters reported by Intel in this sector were not necessarily typical.

2. Loss of the Mellanox acquisition deal

The weakness in the data centers sector stood out against the disappointment Intel suffered only six weeks ago, when it lost the Mellanox acquisition to Nvidia, Intel's small but promising rival. Mellanox's technology was capable of giving any company that acquired it huge competitive edge, but in the case of Nvidia, Intel suffered a double blow. Technologically, Nvidia will be able in the future to prevent Mellanox from selling high-speed communications products for data centers to its competitors. Furthermore, Nvidia's entry into Israel, which hosts development centers of almost all of the large and important chip companies, strengthens the forces competing with Intel for high-quality personnel.

What is happening with 5G?

Intel announced two weeks ago that it was abandoning its 5G mobile communications modems business. The company was to have supplied 5G technology communications chips for Apple's smartphones, but Apple eventually announced that it would use Qualcomm's chips, after the two companies settled a prolonged dispute about patents. Since Apple was slated to be Intel's main customer in this area, Intel's announcement that it was leaving the sub-sector was inevitable. The headlines about Intel's abandoning this market, however, attracted attention when Intel made it clear that it was staying in the market for 5G communications chips for mobile computers, Internet of Things (IoT), and data centers - more significant subsectors for Intel. Intel attributed its measures to the expected low profit margins in smartphone modems deals, and reported late last week that Apple was negotiating to acquire its division (even before Apple's compromise settlement with Qualcomm).

4. Delay in technological developments

Another challenge facing Intel is on the nanometric front. The company is having difficulty in keeping up with its competitors, especially Taiwanese company TSMC and US company AMD. The performance of Intel's 10-nanometer chip architecture is designed to be comparable to that of TSMC's 7-nanometer processors. While TSMC's processors are already in the market, however, Intel has repeatedly postponed the projected date for putting its 10-nanometer processors on the market. AMD is also slated to present its 7-nanometer processors before Intel, thereby breaking a 20-year streak in which both companies presented nanometric breakthroughs simultaneously.

5. Intel disappointed investors again

Intel disappointed investors for the second straight quarter. While the company met its guidance in its current reports, it must be recalled that these projections disappointed investors in the preceding quarter, meaning that they were lower than the expectations. Intel has now published disappointing guidance for revenue in the rest of the year. The company projects $69 billion in revenue in 2019, while the market expected $71 billion, and the company reported in January that it projected $71.5 billion in revenue for the year. The guidance is also lower than the company's $70.8 billion in revenue in 2018. 2019 will be the first year in which Intel's revenue declined since 2015.

In the current quarter also, although the company reported $16.1 billion in revenue, meeting its guidance, this was the same as in the first quarter of 2018; the company reported no growth at all. The company's profit margin fell from 61% in the first quarter of 2018 to 57% in the first quarter of 2019, and its $4 billion net profit in the quarter was 11% less than in the corresponding quarter last year.

6. Will Israel be affected?

Industry sources said that as of now, there is no reason for concern about Intel's activity in Israel, at least in the short and medium term. They added that the difficulties that Intel is experiencing could push the company into investing more in its research and development activity, a substantial proportion of which is conducted in Israel. Furthermore, Intel is likely to be pressed into acquiring promising chip companies, such as Israeli company Habana, which is developing the next generation of artificial intelligence chips and is attracting attention from other major companies, such as Nvidia.

Published by Globes, Israel business news - - on April 29, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Intel building  Photo: Ronen Zvulun, Reuters
Intel building Photo: Ronen Zvulun, Reuters
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