Should Intel (INTC) investors brace for another lackluster year? I believe so, and it’s not just because I’m bullish on AMD (AMD) in comparison to Intel, but because there are a number of factors that should chip away at chipzilla this year, following what has been an already sluggish year in terms of stock performance.
Intel could be conceding market share to AMD this upcoming quarter due to chip production volumes falling short of market demand, and this trend will continue while they make the transition to 10nm chips whereby production volumes haven’t been phenomenal, and the launch delayed a year longer than what was originally anticipated (2018 launch turned into a 2019 launch).
Intel is expected to launch its Ice Lake chips later this year, which will run on its 10nm process, but this mid-cycle node shift has led to more problems than any other node transition in the past decade. It has taken longer, as the yields from the facility have been subpar, which is why they’ve delayed the launch of their Ice Lake chips until yields start becoming more comparable to prior-generation node shifts.
In every process transition, Intel’s gross margins tends to drop before recovering. When compared to the Haswell (22nm) to Broadwell (14nm) transition, this is the longest transition delay we’ve seen. The delays and costs from the 10nm line-up could have been avoided had Intel skipped past 10nm but doing so would have limited the amount of sales they could have generated from a gradual improvement in chip performance.
Production delays have diminished volumes
Bob Swan (interim CEO) mentioned on its Q4’18 earnings call that things in the PC (personal computer side) were delayed even after shipping every available unit possible in Q4:
Within the client business prioritization of big core and to a lesser extent small core lower value-oriented products. And so we do feel like we constrained a fairly healthy PC ecosystem in the fourth quarter. I think when the dust settles on PC TAM, our expectation is that was probably flat and our shipments were down 2%. And that was the function of we delivered every product that we could right up through December 31st. So we did have some constraints on the ecosystem and on our customers during the course of the quarter.
Production constraints are anticipated to drop upon the transition to Ice Lake, but over that period, AMD was able to gain market share from Intel, and it’s mostly because Intel’s pricing is a bit more inflated, and AMD is willing to price chips lower than Intel while providing more performance.
The Ryzen generation has put a damper on Intel’s dominance, and with on-going problems with chip production, and following that gross margins, this is shaping up to be a lackluster year for shareholders. Despite indications that Ice Lake production ramp will offset shortages, there’s also the risk that Intel’s production won’t meet market demand this year either, especially because of the difficulty with ramping chips from a new fab facility, which is why limited quantity production could add more confusion and frustration for shareholders this year.
When things aren’t looking good, Intel usually lays off employees. And… Intel laid off employees over the past week. According to various reports they laid off several hundred IT-related workers, which isn’t the biggest corporate layoff in history, but when considering the flat sales outlook for FY’19, gross margins that aren’t going to be good for a 1st-year 10nm process they may announce even more drastic measures to keep profit margins stable.
At this point, it really wouldn’t be surprising, as Intel’s workforce seems a bit inflated (too many people for what they realistically need) at a headcount of 107,400 versus 9,000 for AMD and 12,000 for Nvidia. If, AMD and Nvidia can manage to create competing products with 1/10th the labor force, it’s difficult to rationalize why Intel can’t consolidate more of its internal operations.
Even after restructuring the business in 2016 with 15,000 layoffs, they still have 10x the number of employees in comparison to its two biggest competitors, and Intel is still trailing both companies in terms of production timelines and production launch starts for new products. At this point, Intel’s profitability won’t be as good in the upcoming fiscal year, and they’re losing sales to AMD in the PC market, and sales to Nvidia in the datacenter.
If Intel announces a massive restructuring this year, it wouldn’t be surprising. If the results this year aren’t going to be that good to begin with, the one thing that might save the company from reporting really bad financial results is another massive round of layoffs, and I’m thinking that a workforce reduction of 20,000 employees could move the needle.
Even if Intel’s headcount drops to 87,000 it would still have an employee base that’s 8x larger than either Nvidia and AMD. Scaling back the size of the organization couldn’t happen at a better time, and with results that are likely to disappoint, it provides Intel the necessary aircover to rationalize to its employees the reasoning for another restructuring.
