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Here's Why Intel Is Dropping $15 Billion in Capital Expenditures This Year

Ashraf Eassa, The Motley Fool

Chip giant Intel (NASDAQ: INTC) is one of the few companies left that both designs and manufactures its own chips. Chip manufacturing is a complex task that requires substantial investments in both research and development to determine how to manufacture smaller and faster chips as well as in the factory space and equipment required to build those chips. The latter manifests itself as capital expenditures.

For some perspective, Intel recently said that it would need to spend "more than $7 billion" to finish building its Fab 42 ("fab" is short for "fabrication plant") in Chandler, Arizona. Keep in mind that the building is already constructed, so that $7 billion-plus is mainly for the equipment that goes inside.

Intel Core processor logos.

Image source: Intel.

It shouldn't be surprising, then, that Intel and its peers each spend billions of dollars per year on capital equipment. Intel's capital expenditures in 2015, 2016, and 2017 were $7.3 billion, $9.6 billion, and $11.8 billion, respectively.

When the company first issued guidance for 2018 back in January, Intel had expected its capital expenditures for the year to be $14 billion. That figure was revised up to $14.5 billion (give or take $500 million) when the company reported its first-quarter earnings results back in April and was recently revised up again to $15 billion (plus or minus $500 million) when the company released its second-quarter results in July.

Let's go over why Intel's capital expenditure plans for 2018 are now $1 billion greater than they were when Intel entered the year.

Scaling up with demand

Intel's original financial guidance heading into 2018 was for revenue of $65 billion, with its so-called "data-centric" business up by a "mid-teens" percentage while its "PC-centric" business was expected to decline at a "low single-digit" rate.

When Intel reported its results in late April, it revised its revenue guidance for the year by $2.5 billion to $67.5 billion (give or take $1 billion). In tandem with the full-year guidance increase, Intel raised its year-over-year revenue growth projections for its data-centric business to "high teens" and for its PC-centric business to "approximately flat."

"That's going to require $0.5 billion additional [capital expenditures] for the second half of the year and as we go into 2019," then-CFO Robert Swan said at the time.

Then, when Intel reported its second-quarter results in late July, the company took its full-year revenue guidance up again to $69.5 billion (plus or minus $1 billion), with the company now forecasting its data-centric revenue to grow by roughly 20% year over year, with PC-centric revenue growth enjoying "modest growth."

Unsurprisingly, since Intel brought its revenue forecast up by another $2 billion, it boosted its capital expenditure forecast by another $500 million.

"In response to the stronger demand, we are raising gross capex [by] $0.5 billion to $15 billion, or $13 billion net of memory prepayments," Swan said.

The struggle is real

On Intel's second-quarter earnings call, interim CEO Robert Swan said the following: "Our biggest challenge in the second half [of 2018] will be meeting additional demand, and we are working intently with our customers and our factories to be prepared so we are not constraining our customers' growth."

"We feel very good about having the supply in place for that fairly significant demand increase," Swan said in reference to the company's revenue guidance of $69.5 billion.

However, Swan did say that the company is "working closely with [its] customer base, both on the server and the PC side, and very closely with [Intel's] internal teams to make sure we're not constrained to the extent that demand in the second half of the year continues to go up like it has through the first six months of the year."

The idea here is simple: If demand for Intel's products continues to go up and the chip maker can't meet that demand, customers could look to alternate chip suppliers for products. Swan made it clear that Intel doesn't want that to happen, saying that the company wants to be able to "fill that demand along the way and not give others the opportunity to fill it for us."

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.