Another Strong Quarter for the Giant

Intel had a strong quarter, but it could be in for a struggle in 2018

This afternoon Intel released their Q4 2017 financial results. The quarter was higher in revenue than was expected by analysts. The company made $17.1B US in revenue and recorded a non-GAAP net of $1.08 a share.  On the surface it looks like Intel had another good quarter that was expected by the company and others alike. Underneath the surface these results have shown a few more interesting things about the company as well as the industry it exists in.

We have been constantly hearing about how the PC market is weak and it will start to negatively affect those companies who's primary products go into these machines. Intel did see a 2% drop in revenue year on year from their Client Computing Group, but it certainly did not look to be a collapse. We can also speculate that part of the drop is from a much more competitive AMD and their strong performing Ryzen processors. These indications point to the PC market still being pretty stable and robust, even though it isn't growing at the rate it once had.

The Data Center Group was quite the opposite. It grew around 20% over the same timespan. Intel did not provide more detail but it seems that datacenters and cloud computing are still growing at a tremendous rate. With the proliferation of low power devices yet increased computing needs, data centers are continuing to expand and purchase the latest and greatest CPUs from Intel. So far AMD's EPYC has not been rolled out aggressively so far, but 2H 2018 should shed a lot more light on where this part of the market is going.

The changes in tax law did have a negative effect on Intel initially as they paid a one time charge of $5.4B US which lead them to have a GAAP net loss of $687 million. Intel did state that the changes in the tax laws will allow them to increase quarterly dividends by 10%. So while Intel took an initial hit, it will be sending less money to taxes with more going towards shareholders.

The quarter did not feel the potential impact of the Spectre/Meltdown security issue that Intel is dealing with right now. The CFO was quoted as saying that the company sees no meaningful impact on corporate earnings.  However, the company then came out with the following statement:

"We have and may continue to face product claims, litigation, and adverse publicity and customer relations from security vulnerabilities and/or mitigation techniques, including as a result of side-channel exploits such as "Spectre" and "Meltdown," which could adversely impact our results of operations, customer relationships, and reputation. Separately, the publicity around recently disclosed security vulnerabilities may result in increased attempts by third parties to identify additional vulnerabilities, and future vulnerabilities and mitigation of those vulnerabilities may also adversely impact our results of operations, customer relationships, and reputation."

This is not exactly reassuring to shareholders and seems to directly contradict the CFO's "no meaningful impact" quote. AMD is susceptible to a variant of Spectre, but it does not show the same level of vulnerability that Intel's products do. We also are seeing 3rd party confirmation of performance hits anywhere from 5% to 30% depending on the application.

Hardest hit are datacenter type applications which can be highly I/O bound. Back end applications such as those powering multiplayer games and complex, interactive websites seem to have the biggest hit to them. Intel has also recommended that users and companies stop applying the latest firmware fixes until a few more things are settled. This could potentially impact Intel in a very negative way when Q1 2018 earnings come out. News of the exploit was released at the very beginning of the new quarter. This may not have a large effect on consumer units, but it could cause enterprise clients to place orders on hold or migrate their roadmap to using EPYC based systems.

Intel claims that they will have a hardware fix for their upcoming chips later this year, but silicon level fixes obviously cannot be applied to current CPUs. Users will have to rely on firmware and OS fixes to close these vulnerabilities.

Intel also spoke very little about 10nm progress. They are aiming for a 2H 2018 ramp, but for now they are relying on their 14nm products. This is probably the longest that Intel has had to compete with AMD on what is essentially very similar processes. Yields for 10nm have apparently been poor and it will be some time before we see the mass introduction of parts based on that node.

AMD is set to announce their Q4 results in 5 days. At that time we will get a better view of the market. I would expect AMD to provide a little bit more guidance on what Q1 will look like for them, and hopefully shed some light on what to expect from Intel. Intel certainly has some serious hurdles in front of them in terms of this vulnerability, their process troubles, and the greatly increased competition from AMD in mobile, consumer, and enterprise markets.