What Intel’s Restructuring Efforts Are Doing for Its Profit Margins
Intel’s profit margins
Intel (INTC) reported better-than-seasonal revenues in fiscal 2Q17, despite competition from Advanced Micro Devices (AMD). When there’s competitive pressure, profit margins are likely to take a hit, but in Intel’s case, its profit margins and EPS (earnings per share) rose faster than its revenues, largely due to restructuring and strong growth in its high-margin product line.
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Intel’s non-GAAP (generally accepted accounting principles) gross margin improved from 61.8% in fiscal 2Q16 to 63% in fiscal 2Q17. Its gross margin is higher than Nvidia’s (NVDA) and AMD’s gross margins of 58.6% and 33%, respectively.
As Intel manufactures its chips in house, its platform costs are lower than those of its rivals. On the other hand, AMD and Nvidia outsource their manufacturing to third-party foundries, which charge a certain percentage, increasing platform costs.
Intel has maintained a gross margin of above 63% since fiscal 3Q16 and expects to maintain this margin in fiscal 3Q17 and fiscal 2017.
Intel’s non-GAAP operating profit rose 30% YoY to $4.2 billion in fiscal 2Q17, representing an operating margin of 28%. The operating profit rose as operating expenses were flat, whereas its revenues rose 9% YoY. The company has been restructuring its operations to focus its spending on the core areas of artificial intelligence, autonomous driving, and Moore’s Law. This has reduced its operating expense as a percentage of revenue from 36.5% in fiscal 1Q17 to 34.5% in fiscal 2Q17.
Notably, Nvidia has a higher operating margin of 34.6%, while AMD has barely managed to report any operating income.
For fiscal 3Q17, Intel expects to reduce its operating expense to 33% of revenues, thereby improving its operating margin to 30%. For fiscal 2017, it expects to maintain its operating expense below 34% of revenues and to improve its operating margin to 29%.
In dollar terms, Intel increased its fiscal 2017 operating income guidance by $600 million, of which $100 million should come from the Mobileye acquisition.
Intel’s non-GAAP EPS rose 22% YoY to $0.72 in fiscal 2Q17, driven by strong revenue in its top line, a higher gross margin, and a reduction in operating expenses. For fiscal 3Q17, Intel expects its EPS to increase 11% sequentially to $0.80. Strong earnings growth and the Mobileye acquisition encouraged Intel to revise its fiscal 2017 EPS guidance by $0.15 to $3.0, of which $0.02 should come from Mobileye in fiscal 2H17.
In a note on July 2017, MKM Partners stated that Intel’s increase in operational efficiencies combined with its focus on data-centric markets should drive continuous improvement in the company’s profit margins.
Next, we’ll assess how these profit margins could impact Intel’s cash flows.