Intel Corp.'s Client Computing Group Cutbacks

Over the last several years, the Intel (INTC 0.64%) revenue story has essentially been a case of its data center business growing at a healthy clip, but declines in the personal computer market (to which Intel is heavily exposed) served to negate that growth.

Image source: Intel. 

In a bid to keep its operating expenses in check as it invests more in growth markets, the company has been trying to cut its spending in its client computing group, or CCG, which mainly sells processors and related components for personal computers.

In this column, I'd like to explore the magnitude of Intel's investment reductions in CCG over the last couple of years.

A haircut in 2015

In 2014, Intel said that the operating income of CCG was impacted by just $80 million because of operating expense reductions relative to the levels seen in 2013. That's not a large reduction -- frankly, it's pretty much noise.

In the following year, though, Intel reported that operating expenses in CCG came down by $375 million compared to 2014 levels.

Down significantly during 2016

This year hasn't wrapped up yet, but Intel made significant operating expense cuts in CCG in each of the three quarters that the company has reported results for so far (see the table below).

Data sources: Intel quarterly filings.

Year to date, Intel has taken a whopping $600 million in operating expenses out of CCG, with the reductions increasing in magnitude as the year has progressed.

This shouldn't come as too much of a surprise considering that the company announced back in April that it was implementing a restructuring program aimed at cutting expenses in some areas (i.e., CCG) so that the company could invest in other areas.

Indeed, Intel said in its restructuring announcement that it expected this program to "deliver $750 million in savings this year and annual run rate savings of $1.4 billion by mid-2017." Don't be surprised, then, to see CCG operating expenses continue to decline throughout the first two quarters of 2017.

CCG's transformation is nearly complete

Intel's aim vis-a-vis CCG seems to be to run it for maximum profit, rather than invest aggressively as if it were expecting to generate significant revenue growth from said investments.

"When you look at where our big investments are going right now, we're going down in [systems-on-chip] for things like phones; we're going down in the PC segment of the business," Intel executive Stacy Smith said at a recent investor conference.

This is a reasonable strategy since the very market that it serves -- personal computers -- is a market that's generally believed to be in structural decline. Intel's execution in the smartphone and tablet markets wasn't great either, so expecting the chipmaker to grow CCG significantly by taking a bunch of profitable share in those markets might not be realistic at this point.

Intel can help to mitigate the decline in its own revenues to some extent by trying to boost its content share within personal computers and by trying to get customers to buy higher-end chips that generate more revenue for the company (Intel has made it clear that it's working to do both of those things).

However, there's very little that Intel can do to change the trajectory of the personal computer market itself. It is what it is and Intel needs to work to squeeze every dollar of profit that it can out of it.