Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Intel Corp.'s Client Computing Business Saw Profits Surge in 2017

By Ashraf Eassa – Apr 12, 2018 at 4:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cost improvements, higher revenue, and lower technology development burden helped to improve the operating profit of Intel's biggest segment.

During 2017, chip giant Intel (INTC 2.71%) reported that its Client Computing Group (CCG), which primarily sells processors and related components into the personal computer market, saw a huge surge in profits. 

Although the segment saw a modest $1.1 billion increase in revenue year over year (thanks to increased laptop chip sales and higher cellular modem sales), operating profit grew by a full $2.3 billion to $12.9 billion.

An Intel executive holding a processor.

Image source: Intel.

In Intel's most recent annual filing with the Securities and Exchange Commission, the company went into some detail on what factors drove the operating profit increase and to what extent each factor contributed to that growth.

Let's dive in to those details.

Platform unit cost reduction

Intel says that it saw a $1.135 billion increase in CCG operating income due to "lower CCG platform unit cost, primarily on 14nm cost improvement."

What this means is that Intel's chip manufacturing costs came down thanks to yield rate improvements on its 14-nanometer manufacturing technology. For a given selling price, a lower manufacturing cost means higher per-unit profitability.

Intel first began manufacturing chips using its 14-nanometer technology in the second half of 2014 and since then has been steadily improving the yield rates and performance of the technology. It's clear that there was still plenty of room for improvement in this technology as Intel exited 2016 -- the second full year of 14-nanometer production -- and Intel managed to deliver the required improvements to increase profitability.

Lower spending share

Intel says that it saw a $630 million increase in CCG operating income due to "lower CCG spending and share of technology development and MG&A costs."

This tidbit is a bit dizzying to take in, so let's break it down.

The "lower CCG spending" refers to cost cutting that happened as part of the restructuring program that the company announced back in 2016.

To understand the second bit, it's important to understand that Intel develops a lot of technologies that are leveraged by many different business units within the company. For example, chip manufacturing technology and core processor intellectual properties are used by virtually every one of Intel's business units.

Early in 2017, Intel announced that it would be shifting more of the shared technology development burden away from CCG and toward its faster-growing Data Center Group (DCG) since, over the long-term, DCG is expected to be the company's primary growth engine.

So a big part of that $630 million reduction is Intel simply shifting some costs away from CCG and toward other business units (primarily DCG, though the company's Internet of Things group seems to have caught some of the burden as well).

Higher gross margin and "other"

Intel says that it saw a $635 million increase in CCG operating income year over year thanks to "higher gross margin from CCG platform revenue."

This one's simple to understand: Intel sold more products, generated more revenue, and that additional revenue brought in additional gross profit dollars.

Intel also says that it saw a $303 million boost to CCG operating income from "Other." The company doesn't specify what "Other" is, but I wouldn't be surprised if that increase incorporated the gross profits from sales of non-processor/platform products in CCG (e.g. Wi-Fi chips, cellular modem chips).

An offset

The year-over-year increase in operating income that Intel reported for CCG was a net figure and if you add up the numbers that I mentioned previously, you'll notice that the sum is greater than the total year-over-year increase in CCG operating income that Intel reported.

Unsurprisingly, there were some cost increases that partially offset the good news that Intel saw in CCG.

In particular, Intel says that it saw a $430 million year-over-year deduction in operating income due to "period charges primarily associated with engineering samples and higher initial production costs from [Intel's] 10nm products."

This isn't anything to worry about, as such costs are typical when Intel is trying to ramp-up a new manufacturing technology (something that it hasn't done in quite a while). Moreover, since it'll probably be a while before Intel begins the production ramp of its follow-on 7-nanometer technology, this drag on operating profit won't be a permanent fixture in the company's annual operating results.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$27.70 (2.71%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.