When chip giant Intel (NASDAQ:INTC) reported its earnings results on July 26, the company raised full-year revenue guidance for the second time this year, from $67.5 billion to $69.5 billion. During the conference call that accompanied the earnings release, interim CEO Bob Swan told investors that while the chipmaker is "seeing demand signals in supply feasibility to deliver on our revised expectations," Intel's "biggest challenge in the second half [of 2018] will be meeting additional demand, and [we] are working intently with our customers and our factories to be prepared so we are not constraining our customers' growth."
We'll get an update directly from Intel on the situation when it reports its third-quarter earnings next month, but in the meantime, memory maker Micron (NASDAQ:MU) had some light to shed on the subject, particularly as it seems to have impacted its own business. Let's take a closer look at what Micron had to say on its Sept. 20 earnings conference call.
CPU shortages hurt Micron's outlook
Micron sells DRAM and NAND flash. These products are applicable across a wide set of computing markets from the slimmest smartphones to the most powerful data centers. One computing segment that's important to Micron is the personal computer market. This hasn't been expanding rapidly in recent years, but the industry still ships a lot of personal computers -- market intelligence firm IDC says that PC shipments totaled 259.5 million in 2017. Those computers all require DRAM and are increasingly incorporating NAND flash in place of slower hard disk drives.
In his prepared remarks, Micron CEO Sanjay Mehrotra observed that "in our fiscal first quarter, we see some impact to our client compute customers due to a shortage of CPUs."
Later during the call, in response to an analyst question about the "magnitude of the impact in the first fiscal quarter" from the CPU supply situation, CFO David Zinsner said that "...[O]n the magnitude side, we're not going to go into necessarily the details, all the details in a granular fashion...suffice it to say that they both had an impact in terms of the [fiscal first-quarter 2019 revenue] guidance of $7.9 billion to $8.3 billion." The other factor that Zinsner references here is "limited inventory adjustments at select customers."
So why are Intel's CPU shortages hurting Micron? It's simple. Every personal computer sold requires a CPU (and, given Intel's market share position, they're usually Intel CPUs). If PC makers can't get their hands on enough Intel CPUs, then they can't build all the computers that they want to sell. This means lower demand for the other components that go into personal computers, such as DRAM and NAND flash.
All eyes on Intel
It's up to Intel now to improve the supply of its products, something that it seems to be trying to do. When asked to comment, an Intel spokesperson provided me with the following statement:
Customer demand has continued to improve over the course of the year, fueling growth in every segment of Intel's business and raising our 2018 revenue outlook $4.5 billion from our January expectations. We will have supply to meet our announced, full-year revenue outlook and we're working closely with our customers and factories to manage any additional upside.
The spokesperson also added that "in response to the stronger than expected demand environment, we are continuing to invest in Intel's 14nm (nanometer) manufacturing capacity."
Intel is set to report its third-quarter earnings results on Oct. 25, so investors in both Intel and Micron should pay close attention to what Intel management has to say about the supply situation with respect to its processors.