Intel’s data center revenue from enterprise and government customers took a major hit in the third quarter, dropping by 47 percent year-over-year due to what the company said was a weaker, pandemic-stressed economy that also hurt its IoT and memory businesses.
The Santa Clara, Calif.-based company reported, however, in its Thursday earnings report that despite a 4 percent decline, its $18.3 billion in third-quarter revenue was above guidance the company gave back in July — and $40 million higher than Wall street’s expectations. The company’s earnings per share of $1.11 was in line with what analysts were looking for.
The results prompted Intel to upgrade its outlook for its full-year forecast to $75.3 billion, which would constitute a 5 percent increase over 2019.
Intel CEO Bob Swan said the company’s new forecast is $1.8 billion higher than what the company expected back in January, “even as COVID has significantly impacted our business mix.”
“2020 has been the most challenging year in my career — with a global pandemic, geopolitical tensions challenging business principles of globalization and social unrest,” he said in the earnings call. “Despite all this, we expect to deliver the best year in our storied 52-year history.”
However, Intel’s good news wasn’t enough to impress Wall Street, as the company’s stock price dropped by more than 9 percent in after-hours trading Thursday.
One area of weakness was the company’s Data Center Group, which reported $5.9 billion in third-quarter revenue. That meant a 7 percent decrease year-over-year, but it was also below the $6.2 billion target Wall Streets had been hoping for. With its 47 percent revenue decline, the enterprise and government segment was the culprit as the division’s revenue from cloud service providers and communications service providers was up 15 and 4 percent, respectively. Average selling prices for Data Center Group was down 15 percent even as unit volumes were up 4 percent.
Intel CFO George Davis said while the company is seeing increased competition, the dip in average selling prices was largely the result of a higher mix of lower-priced, non-CPU products selling well. He added that the company is seeing “some pricing effect from competition.”
“Overall, it was really a mixed story,” he said. “We‘re seeing increased competition in the second half of the year, but not different levels of competition than we thought.”
Swan said that Intel’s second phase of third-generation Xeon Scalable processors, code-named Ice Lake, won’t start shipping until the beginning of next year, which is later than the end-of-2020 target the company gave in its previous earnings report. The company said it now “targeting” server qualification for the 10-nanometer processors by the end of the year.
Asked by an analyst how quickly Intel’s next-generation Sapphire Rapids server processors will launch after Ice Lake, Swan said the two product lines will be spaced out by four quarters, which is “not dramatically different than how we’ve approached it in the past.” However, he declined to specify when volume shipments for Sapphire Rapids could begin.
“I think people are pretty excited about getting Ice Lake out and equally excited about the enhanced features of Sapphire Rapid at the end of the ,” he said. “As long as we got it fairly laid out, predictable, so our customers can plan effectively, we want to be able to continue to do that cadence of leadership products, kind of in sequence in four-, maybe five-quarter kind of timeframes.”
In other 10nm news, Swan said Intel has turned on its third 10nm manufacturing plant, which means 10nm production volume will be 30 percent higher compared to what the company expected at the beginning of the year. Intel is also now expecting 100 laptop designs to ship at the end of 2020 with its new 10nm Tiger Lake CPUs, double what Intel had previously forecasted.
Swan said the increased 10nm production is the main reason the company’s gross margin is expected to be down by roughly 2 points compared to the company’s previous guidance in January.
The CEO said Intel is also now shipping its first discrete graphics card, a product for laptops called Intel Iris Xe Max, for revenue while reporting its first power-on for its second discrete graphics card, code-named DG2, that will be made for the high-performance gaming segment.
Swan said Intel’s Habana Labs, the AI chip startup it acquired for $2 billion nearly a year ago, is now fully integrated into the company’s platform capabilities.
“Habana’s inference card is now in volume production and shipping to customers,” he said. “We’re also in proof-of-concepts with several major cloud service providers on Habana’s training card.”
Another question Swan and Smith faced from investors was the status of the company’s 7nm manufacturing process and when the company will know whether it will use an external foundry, like TSMC, or keep manufacturing internal for future products. The company revealed last quarter that its 7nm process had a defect, delaying products on that node by six months.
Since identifying the issue in Intel’s 7nm process, the company has made “wonderful process” in fixing it, Swan said, though the company will continue to evaluate using a third-party foundry in the future.
Swan said the company will know by around January as to whether the company will buy additional 7nm equipment for its internal capacity versus making orders with a foundry, but it won’t necessarily mean Intel will go completely one way or the other.
“It‘s probably not an all-or-nothing. It’s probably a mix in terms of the best path to ensure that we have a predictable cadence leadership product for  and  like we believe we will have in 2021 and ,” he said.
Bob Venero, CEO of Future Tech Enterprise, a Holbrook, N.Y.-based Intel partner, said the news of Intel’s enterprise and government segments being way down was not surprising.
“Amidst a global pandemic, people aren’t going to invest in their infrastructure They’re going to pivot and wait to see what happens,” he said. “They need to move funds from infrastructure and data center to remote and mobile, and that’s what we saw everywhere. We saw that not only in the commercial customers, but in our federal customers.”
Venero said Intel’s ramp of 10nm products was good news because his company is currently experiencing shortages in laptops and Chromebooks, and he needs relief as soon as possible. With one customer, for example, Future Tech has only been able to fulfill just a little more than half of 15,000 Chromebook orders since June.
“It‘s so important that they get up to speed on Tiger Lake, and hopefully it’ll save a lot of the back-order challenges and customer challenges that we’re all facing right now,” he said.