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Intel’s Operating Leverage to Fall in 2019

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Updated

Full-year operating leverage

So far, we’ve learned that Intel (INTC) expects its revenue to rise 13.4% YoY (year-over-year) and its operating expenses to rise less than 1% YoY in 2018. Such high returns on lower investments are expected to reduce its 2018 operating expense ratio to 28.5% from 32.5% in 2017.

In 2018, it divested its Wind River and Saffron businesses and discontinued some of its wearables products.

Intel is shifting its R&D (research and development) expenses toward AI, 5G, and AV (autonomous vehicle) technology. It should start realizing the benefits of these investments in late 2019, when 5G deployment gathers momentum. 5G technology should provide an appropriate ecosystem for the adoption of AI, AV, and IoT (Internet of Things) technology.

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Operating leverage in 2019

Intel’s operating expense ratio is expected to rise in 2019 for multiple reasons. Its R&D cost in memory technologies will increase as it ends its Flash Technologies joint venture with Micron Technology (MU). Moreover, Intel will accelerate the launch of its 10 nm (nanometer) products to catch up with Advanced Micro Devices’ (AMD) 7 nm products, thereby increasing its operating expenses.

Intel’s board is looking to hire a new CEO before its earnings release on January 24, 2019. Internal candidates who were offered this position refused to take on the role. Intel’s trouble hiring a new CEO hints that its 2019 earnings guidance will reflect upcoming headwinds, which the new CEO will have to tackle immediately. We’ll look at these challenges next.

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