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Intel Corporation's Biggest Business Sees Large Jump in Profitability

By Ashraf Eassa – Jul 29, 2016 at 9:15AM

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Gross margin and operating expense improvements help boost profitability in this Chipzilla's biggest business unit.

Image source: Intel. 

Though not exactly a "growth" segment, microprocessor giant Intel's (INTC 0.61%) largest business is its client computing business. This mainly consists of sales of PC processors and related components, and so its performance is quite dependent on the PC market as a whole.

Surprisingly, this segment proved to be something of a bright spot in Intel's most recent quarterly earnings report. Though management had previously guided for the personal computer market to see a "high-single-digit" decline in units (and Intel actually still maintained this guidance), this segment saw a revenue decline of just 3% in the most recent quarter.

On top of the solid revenue performance, the company also enjoyed a large boost in the operating profit of this segment, with that figure jumping 19.2% year over year.

Let's take a closer look at what drove these results.

Understanding the revenue story

On a year-over-year basis, Intel said that shipments of platforms targeted at notebook PCs declined 5%. This, according to the CFO commentary, was actually better than the company had expected going into the quarter (unsurprising given the company's current outlook on the PC market). On top of that, Intel reported a 2% bump in average selling prices on notebook-related shipments (this seems like a result of a richer product mix), which helps the revenue picture.

The desktop market wasn't as kind to Intel, with units declining 7%. The good news is that average selling prices in this segment were up 1%, helping to blunt that unit decline slightly.

Finally, Intel said that its tablet processor shipments plunged 49% year over year and that its average selling prices on those products were "up significantly."

It seems that the better-than-expected revenue result was largely driven by success in the notebook market, both in terms of units and average selling prices.

What about the operating profit improvement?

Perhaps just as interesting here was the significant jump in operating profit that this segment enjoyed. On the accompanying earnings call, CFO Stacy Smith said that the boost in operating profit was "driven by lower overall spending and margin improvements in [Intel's] mobile products and higher [average selling prices] in the PC segment."

The "lower overall spending" is probably in reference to the major restructuring that the company announced last quarter. A lower headcount, coupled with the axing of several projects, means that operating expenses go down and operating margin moves up for a given level of revenue.

The "margin improvements" in the company's mobile-related products are probably due to the company's continued withdrawal from the tablet market. The company has probably stopped shipping chips that require contra-revenue payments, which no doubt contributed to the much higher average selling prices for those products.

There's more to the story, though.

In the CFO commentary, Intel cites "lower platform unit cost" as well as "higher platform volume (primarily in notebook)" as two upside drivers to the margin number. The former is likely a result of better-than-expected manufacturing yields on the company's 14-nanometer manufacturing technology; the latter is almost certainly due to the improved factory utilization that comes with higher volumes.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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