Intel has published a letter confirming its own supply issues in Q3 of this year, while simultaneously affirming its overall guidance for Q4. The letter, from Michelle Johnston Holthaus, GM of the Sales, Marketing, and Communications Group at Intel, acknowledges and apologizes for the yearlong PC supply shortage that Intel’s OEM customers have been grappling with.
The letter indicates that shipping delays for PC parts have become worse in recent weeks and that Intel is still struggling to ship. “Despite our best efforts, we have not yet resolved this challenge,” the letter reads. It refers to the “recent” impact PC CPU shipment delays may have had on Intel’s partners, with references later in the letter implying that production variability in Q3 has made it harder for Intel to deliver CPUs on time.
Intel, I want to note, is serious about this letter. Serious enough that when I visited the company’s financial page (to review what its Q4 guidance was), I actually saw this notification:
This is a bit more aggressive than one would normally expect for a supplier update.
The letter states that Intel has invested record amounts of cash in expanding 14nm production this year at the same time it’s ramping 10nm, but notes that continued demand constraints are pinching Intel fabs. We haven’t seen Intel struggle like this for fab production for a long time, but there are several potential explanations. First, there’s the fact that Intel has historically carefully managed production, bringing fabs online and deploying new processes, while older fabs transition to manufacturing secondary parts on older nodes. The long delay to 10nm blew this strategy up. Intel deployed multiple generations of products on 14nm, but this time it had to sharply increase core counts without the density improvements it would have otherwise gained.
Yield issues are another place where Intel may be pinched at the moment. New nodes always suffer from lower yield than full-fledged mature products, and Intel’s 14nm manufacturing should be in an excellent place right now. But after so many years of delay, and with a need to make certain it hit its “Holidays 2019” forecast for 10nm, Intel may have been forced to put the node into wider production at a lower yield than it would have otherwise done, had the delays not happened in the first place. Allocating more fab space for production on a low-yielding node would also hit overall manufacturing capability — you’re using fab lines to build lower-yielding 10nm parts rather than higher-yielding 14nm ones. This is partially offset by the fact that the 10nm chips are all mobile quad-cores at the moment, but clearly Intel is still struggling to bring its CPU shortage completely under control.
The company letter states that Intel is “increasing our use of foundries,” implying that the rumors we heard about Intel outsourcing some chipset or non-CPU work to companies like TSMC were true. Depending on exactly which work Intel wants to outsource, it could theoretically partner with GF or Samsung as well. Holthaus says that Intel increased CPU supplies by double digits in 2H 2019 compared with first-half, but that sustained market growth has kept pace and that “supply remains extremely tight in our PC business where we are operating with limited inventory buffers. This makes us less able to absorb the impact of any production variability, which we have experienced in the quarter.”
To date, Intel has taken the impact of its shortage at the low end of the market, choosing to emphasize high-end shipments to maximize revenue. This has paid dividends — the company’s performance in Q3 2019 set a record, even as the shortage continued to grip the market. It may also be paying dividends for AMD, however, which has been gaining market share partly as a result of Intel’s difficulty with shipments.
Intel’s guidance for Q4 is as follows: Approximately $19.2B in revenue, with an operating margin of 31.5 percent (Intel’s gross margin, which is what we normally discuss, is much higher), a tax rate of 15 percent, and earnings per share of $1.28. Revenue in Intel’s CCG (PC) group was $9.7B in Q3 2019, down 5 percent. Overall revenue in Q3 2019 was up 6 percent compared with Q3 2018, however, thanks to growth in data center, IoT, Mobileye, networking, and FPGA.
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