Intel (INTC +0.30%) is a type of chip company that's known as an integrated device manufacturer, or IDM. What this means is that the chip giant, unlike most other companies in the industry, both designs and manufactures its own chips.
Being an IDM is an expensive proposition. Not only do such companies need to spend a lot of money each year to develop the manufacturing recipes, but they also need to invest heavily in the factory space and the expensive tools that go into those factories. The vast majority of Intel's capital expenditures (capex) are for chip factories and their equipment.
Image source: Intel.
Over the course of 2018, Intel has continued to bump up its capex plans, raising its guidance from the $14 billion that it gave in January to $15.5 billion in its Oct. 25 earnings release.
It's also worth noting that Intel now manufactures both non-volatile memory products (e.g., 3D NAND flash memory) as well as logic chips, with logic accounting for the vast majority of Intel's business and, ultimately, its capex.
Intel hasn't yet provided a number for its 2019 capex budget, apparently because some factors are still in flux. Let's look at what CFO and interim CEO Bob Swan had to say on the topic.
The factors driving Intel's capex in 2019
Swan explained that the company expects its logic-related capex in 2019 to likely be a little higher than it was in 2018, and that its memory-related capex will be a little lower.
After that, he went over four things that'll impact just how much higher and lower those 2019 logic and memory capex levels will be, respectively.
"As we get clearer around what growth looks like in 2019 for 14-nanometer [nm], that will impact what the overall capex level is," Swan said.
Beyond that, he explained that Intel has "made some good progress on 10nm yields over the course of the last six months." The 10nm technology is intended to succeed the company's current 14nm technology. (Contrary to a recent report, it hasn't been canceled.)
"As we progress through the fourth quarter and into 2019, if we're further ahead on 10nm yields, that will influence the amount of capex next year," Swan stated.
He also said that "how well we progress on 7nm also will influence how we think about capex." (As 7nm is the technology slated to succeed the company's upcoming 10nm technology.)
Clarifying these statements later on the call, Swan said that "when we step back and think about capex for next year, again, it's a function of growth on 14nm, it's a function of the rate in which we scale 10 [nanometer], and it's a function of investments we make to begin to prove out 7 [nanometer] in a more meaningful way."
And, finally, he touched on memory: "And last but not least, as it relates to memory, it's more the customer [qualifications] and adoption of our leading-edge 3D NAND 96-layer product. As we continue to make progress on developing that, we may deploy that capital, and that pays for itself very quickly."
I look forward to seeing what Intel's projected 2019 capex ultimately comes out to be, as well as some insight into both how 10nm yields are progressing and how the development of the company's follow-on 7nm technology is going.
