Intel reported its fourth-quarter financials today in what was probably one of the company's most anticipated briefings in recent history. Intel's financial performance has always been solid, often led by stellar +60% margins, but this briefing was somewhat different as some predict that the shadow of the Meltdown and Spectre vulnerabilities threaten to blot out some of Intel's black ink. That surely didn't happen, though, as Intel posted record results yet again. Its stock is up 3.89% after hours, but we did learn some new information about the company's plans to address the vulnerabilities.
Intel reported yet another banner quarter with an 8% increase in quarterly revenue, up to $17.1 billion, with the data center, programmable solutions (FPGA), and IoT groups leading the record revenue (excluding McAfee). Full-year 2017 revenue weighed in at $62.8 billion, a healthy 9% YoY growth rate. Notably, earnings per share were up 37%.
Here Comes The Silicon Patch
Intel CEO Brian Krzanich started the call with a short restatement of the company's commitment to security, which sounded very similar to his statements in the CES 2018 keynote.
Krzanich later said the company would begin to ship products with "in-silicon" fixes for the vulnerabilities by the end of the year (Q4). He did not quantify the statement further, but logically this means that the company will include these fixes in the 10nm generation of products. Krzanich also later stated that the company expects to continue developing its 14nm products in 2018, so we could see yet another round of 14nm processors (sigh). Of course, one could speculate that these chips might also have in-silicon patches for the vulnerabilities.
Intel's newer chips (post-Broadwell) support a PCID (Post-Context Identifier) feature that helps reduce the performance impact of the Meltdown patches on newer hardware. Intel's plans to institute in-silicon fixes could reduce the impact even further, or perhaps remove it entirely. That's a sorely needed feature for a company that is reeling from the never-ending onslaught of press coverage around the vulnerabilities.
Some analysts are predicting that Intel could experience higher sales as companies refresh their hardware to offset the lost performance from the patches. Considering Intel's apparently fast cadence of in-silicon fixes, that could hold true. Krzanich also said the company is focused on developing high-quality mitigations for customers, and it has created a website dedicated to helping customers deal with the vulnerabilities. (The link to this website has not been provided. We have requested the link.)
Did Someone Mention 10nm?
Intel also re-stated that it shipped some low-volume 10nm products last year, though again, the company did not provide any specifics about the number of units or the customer. Krzanich stated that the company would continue to ship 10nm processors in the first half of 2017 and then kick into high-volume manufacturing in the second half of the year. Intel noted that the cost impact of the 10nm ramp would increase in the second half of the year. That likely means we will see Icelake processors in that same time frame.
Potential Financial Impact Of Meltdown/Spectre
It's definitely far too early to see any potential financial impacts from any of the pending lawsuits or the costs associated with the ongoing patch efforts. For instance, during Intel's Q4 2016 earnings call, we reported that Intel mentioned it had created a then-undefined financial reserve to deal with a large-scale warranty return for higher than expected processor failure rates. We later learned that fund was due to the Atom C2000 failures. Intel did not make any mention of any new funds or reserves to deal with pending re-compensation programs for customers, although it did mention that last year's fund cost them some profitability ("four points").
Intel is obviously confident that it will not feel any near- or long-term pressure to its business.In response to a question from an analyst about the potential impact of the vulnerabilities on Intel's financial forecasts, Krzanich responded:
"From a cost standpoint [...] we don't expect any material impact of this security exploit on our spending or product costs, or any of that, that's how we bake that in."
Krzanich expanded and said that the company continually re-evaluates its forecasts, including over the first few weeks of this year, and the forecasts have not changed.
It Isn't All Rosy
There were a few hiccups in Intel's growth story, though. The company's oft-maligned (yet promising) 3D XPoint DIMMs are delayed for what is conceivably the remainder of the year—the company says they will not have an impact on 2018 revenue. That's a pretty significant setback for a promising technology that we last heard was coming in the second half of 2018. It's possible that Intel's delayed DIMMs are due to challenges with the first-generation media and bringing those to market with the second-generation 3D XPoint is the obvious fix. As such, this continued delay could mean that second-gen 3D XPoint isn't on schedule.
Intel also announced that its enterprise SSDs with 64-layer NAND were delayed in the fourth quarter, which is another setback. The company did not expand on the topic.
Intel recently announced that it's parting ways with long-time NAND venture partner Micron, but the two companies will continue to develop NAND products together throughout the end of the year. That means Intel will not realize a significant impact on its 2018 financials because it will begin shouldering the extra NAND R&D load in 2019. Intel also signed a few more long-term NAND supply contracts, which is a new tactic for the company that it first mentioned last quarter. Intel now has guaranteed sales of $2 billion in NAND in 2018.
Now The Other Good News
Intel touted its continuing improvement in the AI field and noted that its Nervana processor ran a neural network within the first two weeks that the company had working silicon. Those products are now shipping. Krzanich also touched on the fact that Stratix 10 is shipping, but later in the call, we learned that the company's stellar performance in its PSG group (FPGAs) stems from increased end-of-life sales, not Stratix 10.
Intel also continues to profit from its 14nm process as costs drop, and the Xeon Skylake sales ramp is fattening the bottom line.
Intel is in the second year of a three-year effort to transition itself to a data-centric company, which means less focus on its bread-and-butter desktop PC business. Intel said that even though the PC market is down 2%, it's still a reliable source of profitability (best profit since 2007) that funds investments in the new data-centric growth areas.
Intel also noted that it's increasing its spend in R&D for GPUs, AI, and Automotive, but it did not quantify the issue further. Notably, the company did not provide any financial information for the newly-formed Core and Visual Computing Group headed by Raja Koduri.
A 14% Tax Rate, But First...
Intel revealed that it will pay a 14% tax rate in 2018 (wow), but that a one-time charge this year resulted in an overall loss for this quarter:
Intel's fourth-quarter results reflect an income tax expense of $5.4 billion as a result of the U.S. corporate tax reform enacted in December. This includes a one-time, required transition tax on our previously untaxed foreign earnings, which was partially offset by the re-measurement of deferred taxes using the new U.S. statutory tax rate.
Tell Us About AMD
Finally, an analyst asked Krzanich if the company was seeing any pressure from AMD, but, as per Intel's unspoken policy, Krzanich did not mention AMD by name or respond directly to the question. AMD's increased pressure on Intel has been a godsend for enthusiasts and normal consumers alike, largely because it has forced Intel to deliver better value. But given Intel's solid execution, AMD hasn't hurt the company seriously. Intel's CCG (Client Computing Group), the CPU-making division for desktop PCs, did fall 2% this quarter. Intel chalked up to the continuing decline in the PC market in general.