Intel's Betting on a Data Center Rebound Later in 2019
In 2018, chip giant Intel (NASDAQ: INTC) reported that it had generated $70.8 billion in total revenue. Although that figure was lower than the $71.2 billion that the company had originally guided to back in October of 2018, Chipzilla still managed to post 13% top-line growth for the year.
A big driver of that overall growth was strength in the company's data center group (DCG), which saw revenue surge 20.6% from the prior year and operating profit soar 36.7% over that same period.
Image source: Intel.
Unfortunately for the company, DCG actually fell short of the company's expectations going into the quarter, delivering revenue of about $6.07 billion against its own expectation of roughly $6.3 billion in revenue. CFO and interim CEO Bob Swan blamed that miss on "weakness in China demand," as well as cloud service providers digesting capacity that they'd "put in place earlier in the year."
The weakness isn't expected to have ended in the fourth quarter of 2018. Swan said that in the first quarter of 2019, the company's so-called "data-centric" revenue will be "down low single digits" thanks to "broad weakness in data center and continued NAND pricing pressure."
Let's take a closer look at the company's data center expectations for the entirety of 2019.
Things get better in second half
During the call, Swan explained that "as we project forward in the first six months of the year, we think that it's going to continue to be consumption on the server side and pricing in the [non-volatile memory solutions group] environment to be down through the first six months."
However, the executive went on to explain that "we do expect purchasing to start picking up again in the second half of the year."
The head of DCG, Navin Shenoy, also chimed in, pointing out that the company's upcoming data center processor, which goes by the name Cascade Lake, will "start to ramp in the middle part of the year and into the second half of the year."
The executive talked up the virtues of that product and claimed that "customer momentum around that pipeline" was strong and, ultimately, echoed Swan's thoughts, saying that "the first half [is] a little bit tougher but the second half with product momentum, as well as what we're hearing from our customers, we expect to be better in the data center group."
We'll have to wait and see
One of the issues that some investors might have with this commentary is that there have been times when Intel management promised that things would get dramatically better for DCG in the second half of the year but ultimately didn't.
For example, in 2013, Intel saw DCG growth of just 8%, even though management had guided to "double-digit" revenue growth for the year. At the time, at least one analyst -- on the third-quarter of 2013 earnings call -- seemed skeptical that the company would be able to hit its full-year guidance, noting that "[Intel] would need to grow data center plus 20% in the fourth quarter to get [to Intel's DCG growth target for the quarter]."
Then-CFO Stacy Smith backtracked a little bit from Intel's commitment to grow the business by a double-digit percentage for the year, urging the analyst to not "pin me down to exactly 10% growth but we are going to be within spitting distance of that for the year."
That clearly didn't happen.
On the flip side, DCG generated much more revenue than what the company had expected it to at the beginning of 2018.
Now, I don't have a crystal ball, so I don't know how the year will ultimately play out for DCG, but the point is this: There's an element of unpredictability to any company's forecasts since there are factors that are simply out of that company's control. And that unpredictability can mean that a company's results can be either better than expected or worse than expected.
We'll just have to see how things go over the course of 2019 and whether the company revises its full-year guidance up or down based on that progress.
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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.
