One of the growth opportunities that chip giant Intel (NASDAQ: INTC) is pursuing is the rapidly expanding market for non-volatile memory products, which includes NAND flash (a type of computer memory commonly used for fast, efficient storage), as well as 3D XPoint, a unique technology that Intel helped to create for customers who want storage that’s even faster than NAND flash.
This business unit is called Intel’s non-volatile memory solutions group (NSG).
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In 2017, this segment delivered record revenue results, although profitability remained elusive as the company’s investments in future technologies and the ramp-up of NAND flash production in its Fab 68 facility in Dalian, China, offset the good sales performance.
Let’s go over how this business performed in the first quarter of 2018 and put that into the context of Intel’s long-term prospects.
Strong growth, narrower loss
NSG enjoyed revenue of $1.04 billion in the first quarter of 2018, up 20% from the same quarter a year ago. The business still lost money — $81 million, to be exact — but that loss was narrower than the $129 million loss that the business suffered in the first quarter of 2017.
The company attributes the year-over-year revenue growth to higher unit shipment sales to data center customers, though that growth, Intel says, was partially offset by lower average selling prices “due to mix of products” (this means that Intel sold, on average, cheaper products).
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As far as the operating loss reduction goes, Intel says that this was due to the continued production ramps of its new triple-level cell (TLC) NAND flash and 64-layer 3D NAND flash-based products, which helped to reduce the company’s product cost structure compared to the technologies it was shipping last year.
The lower unit cost, Intel says, “outpaced the decline in [average selling prices],” suggesting an improvement in gross profit margin.
Although the business lost money in the first quarter of 2018, Intel reiterated its expectation that NSG would be profitable for the full year.
The bigger picture
Ultimately, Intel’s entry into the non-volatile memory business is meant to allow the company to grow its revenue while also complementing its other businesses. For example, Intel is the leading vendor of processors and platforms for personal computers, and personal computers are increasingly shifting toward NAND flash-based storage drives, so Intel can try to offer major PC makers NAND flash-based drives alongside processors, wireless chips, and other components.
The same argument applies in the data center. In fact, Intel’s position in data center storage drives is quite a bit stronger than its position in consumer/PC oriented products because Intel’s portfolio of data center solid-state drives is much more competitive than its consumer solid-state drive portfolio.
On top of that, Intel’s competitive advantages in drive performance tend to be more valuable to data center customers (who will pay more to boost performance and ultimately lower their operating expenses) than to consumers, who often just want as much storage as they can get for the lowest price.
Intel’s investment in building out its memory business has been substantial in terms of both technology research and development expenses and capital expenditures, but considering that this business continues to deliver strong revenue growth and could soon be a source of robust profit growth, I’d say those investments have been and continue to be well worth it.
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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.
