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Cost Control and Margins: Highlights of Intel’s Fiscal 2Q15

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Jul. 29 2015, Updated 11:06 a.m. ET

Operating segment’s performance

In the last part of the series, we discussed the performance and revenue contribution of Intel’s (INTC) various operating segments in 2Q15. Intel’s CCG (Client Computing Group) continued to report a fall in revenue that was offset, to an extent, by the DCG (Data Center Group) segment, IoT (Internet of Things) segment, and NAND.

In fiscal 2Q15, the gross margin stood at 62.50%. The operating income and net income were $2.9 billion and $2.7 billion. The operating income fell 25% on a YoY (year-over-year) basis. The net income fell by 3%.

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DCG contributes the most to margins

In fiscal 2Q15, the CCG segment’s contribution towards the operating profit was $1.6 billion—a fall of 38% on a YoY basis. Low desktop and notebook revenue and high unit cost contributed to the fall in its margins. DCG provided ~$1.8 billion in operating income. In comparison to the other segments, this was the maximum contribution.

Its recent Altera acquisition is also expected to aid in margin expansion. Intel (INTC) also shared that it expects ~60% of Altera’s buyout value to come from “product synergies” in the DCG and IoT spaces. The remaining 40% of the value is expected to come from “cost and manufacturing synergies.”

Intel continues to allocate substantial funds to R&D

Intel expects its margin to expand to 63% in fiscal 3Q15. An important thing to note here is that while Intel is cutting operating expenses, it isn’t doing this at the expense of R&D (research and development). Growing competition and rapid technological breakthroughs, like the IBM’s (IBM) development of new capabilities for the 7 nm (nanometer) chip, put pressure on Intel. Intel has to continually invests huge amounts to develop cutting-edge and better technologies than its peers. Investment in R&D ensures that the company has a competitive edge, especially in the semiconductor space.

Usually in the technology sector, companies resort to a reduction in their R&D. This might give immediate cost reduction, but it hampers growth in the future. AMD (AMD) is a company that cut its R&D. It’s undergoing a restructuring phase. In contrast, NVIDIA (NVDA) invests ~30%–32% of its revenue in R&D.

You can consider investing in the VanEck Vectors Semiconductor ETF (SMH) and the Technology Select Sector SPDR Fund (XLK) to gain exposure to Intel. SMH and XLK invest 19.4% and 3.55% of their holdings in Intel, respectively.

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