22 Apr

Understanding Intel’s Strong Margins amid Slow Revenue Growth

WRITTEN BY Puja Tayal

Intel’s fiscal 1Q16: different from past earnings

Intel’s (INTC) fiscal 1Q6 earnings were a mixed bag of good and bad news. This is the first quarterly earnings reported under the company’s revised reporting structure, which incorporates the following four new business segments:

  • Memory
  • Security
  • Programmable Chips
  • New technology

This earnings report also incorporated the earnings from Intel’s Altera business, which it acquired in fiscal 2015.

Understanding Intel’s Strong Margins amid Slow Revenue Growth

Intel topped analyst estimates for EPS

In fiscal 1Q16, Intel’s non-GAAP (generally accepted accounting principles) revenues rose by 8% YoY (year-over-year) to $13.8 billion, just missing the analyst estimate of $13.83 billion, which was a conservative estimate. The company benefitted from growth in key business segments, however. The company’s CCG (Client Computing Group) saw its revenues rise by 2% YoY, with weaker-than-expected PC revenues being offset by a strong product mix and an extra week in the quarter.

The company’s non-GAAP EPS (earnings per share) rose by 20% YoY to $0.54, topping the analyst estimate of $0.47. While the YoY figures look optimistic, the QoQ (quarter-over-quarter) figures show a downward trend. The company’s revenues and EPS fell 7% and 29%, respectively, in fiscal 1Q16 on a QoQ basis.

Profitability

On a non-GAAP basis, the company’s gross margin rose from 61.4% in fiscal 1Q15 to 62.7% in fiscal 1Q16, which was higher than the company’s guidance of 62%. Intel’s gross margins improved as the cost per unit fell due to the cost benefits derived from the 14 nm (nanometer) technology and higher platform ASP (average selling price).

Intel’s operating margin improved from 22.6% in fiscal 1Q15 to 23.9% in fiscal 1Q16. Its operating expenses rose by 9% YoY during the quarter due to the integration of Altera.

Restructuring

Like IBM (IBM), HP (HPQ), and Microsoft (MSFT), Intel has been transitioning from a PC-centric company to a company focused on the cloud and IoT (internet of things). Intel has announced a restructuring plan to make this transition effective.

Notably, the iShares Russell 1000 ETF (IWB) invests in large-cap stocks across various industries. It has 0.72% exposure to INTC and 0.64% to IBM.

In next part, we’ll take a closer look at Intel’s restructuring strategy.

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