PC and server process giant Intel (NASDAQ:INTC) reported its third-quarter earnings results and issued guidance for the fourth quarter following market close on Oct. 13. The third-quarter results of $14.5 billion in revenue and $0.64 in earnings per share were better than analyst consensus of $14.22 billion and $0.59, respectively.
Revenue guidance for the fourth quarter was in line with expectations at $14.8 billion, give or take $500 million. Using the midpoints of Intel's gross margin and spending forecasts for the quarter, the company appears to be calling for diluted earnings per share of $0.64 -- slightly ahead of the analyst consensus.
On the surface, it would appear that Intel did a good job in the third quarter and issued passable guidance for the fourth quarter. Let's take a closer look at the results to see if things look as good under the covers as they do on the surface.
What's going on with the Client Computing Group?
Although Intel reported a sequential improvement in PC platform volumes and revenue by 3% and 9%, respectively, the company still faced a 7% revenue decline in its Client Computing Group. The unit decline was even worse, with platform volumes down a whopping 19%, but this was partially offset by higher average selling prices across notebooks, desktops, and tablets.
The average selling price increase was good to see, as it suggests that Intel is selling a richer mix of platforms to its customers. Intel CEO Brian Krzanich said on the earnings call accompanying the earnings release that this richer mix was "driven largely by [Intel's] sixth generation Core products."
It's also worth mentioning that although tablet unit volumes plunged 39% year over year, the company reported seeing a boost in average selling prices there as well. This, Intel executives noted on the call, is because Intel's "contra-revenue" subsidies are rolling off as it sells more appropriate platforms into this market.
The Data Center Group disappoints
One segment that Intel has been very bullish on for quite some time is its Data Center Group. At the company's investor meeting last year, management had said tthey expected revenue in this business to grow by more than 15%, with operating profit growing even faster than that, during 2015.
This view was reiterated during the company's first- and second-quarter earnings calls. In particular, on the company's second-quarter call, management had indicated that its enterprise server platform sales were coming in below expectations but that other growth areas within the business (such as cloud and networking) would pick up the slack.
Apparently the enterprise server market has deteriorated to the point where growth in the non-enterprise segments of the business can't be expected to fully offset the weakness the company is experiencing in the enterprise market.
In light of this view, Intel lowered its full-year Data Center Group forecast from "more than 15% growth" to just "low-double digit" growth, which should mean anywhere from 10% to 13% growth for the year. This is still a respectable result in light of how large and profitable this segment is, but investors will probably still be disappointed that the company didn't meet its own goals.
On the bright side, Intel management did indicate on the call that its long-term growth expectations for this segment of 15% annually through 2018 remains intact.
NAND growth strong, Internet of Things Group picking up
Intel reported that its memory business -- which Krzanich said mostly consists of selling enterprise solid state drives into data centers -- grew a solid 20% year over year in the quarter. Krzanich was also bullish on the company's coming transition to 3D NAND, which he says will give Intel a "performance and cost" advantage over its competitors.
He's also bullish on the company's 3D XPoint technology, which the chip giant's chief says is sampling this year and should begin shipping in products. These products will initially be targeted at servers but Krzanich thinks that this technology will move out into "a variety of applications" such as mobile and the Internet of Things.
Speaking of the Internet of Things, Intel reported that its Internet of Things Group grew by 10% year over year, "driven by the video, manufacturing, and retail segments." This segment grew by 11% in the first quarter of the year and by just 4% in the second quarter of the year.
Although the return to double-digit growth here on a quarterly basis is nice, recall that Intel had told investors to expect an "uptick" in growth this year from the 19% growth that it experienced last year. Given the growth numbers that Intel has delivered in this segment over the last three quarters, the company looks on track to miss its full-year forecast.