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Intel Squeezes Profits from Client Computing in Fiscal 2Q16

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Client Computing Group

In the previous part of the series, we saw that Intel (INTC) launched its third 14nm (nanometer) microprocessor “KabyLake.” Its predecessor Skylake wasn’t able to boost PC shipments. There are hopes that KabyLake might improve sales in some segments such as gaming and notebooks.

The CCG (Client Computing Group) is comprised of processors for PCs and mobile phones. It accounts for 54% of Intel’s revenue. The company commands an 80% share of the PC processor market.

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Revenue

In fiscal 2Q16, Intel’s CCG revenue fell 3% YoY (year-over-year) to $7.34 billion as worldwide PC supply chain inventory levels reduced at a slower rate. Moreover, Intel exited the tablet market removing the tablet sales from the CCG revenue. At the fiscal 2Q16 earnings call, Intel CEO Brian Krzanich said, “These results were a little better than we expected.”

The company’s unit volumes fell 15% YoY, while its ASP (average selling price) rose 13% YoY in fiscal 2Q16. This is because of strong double-digit growth in demand for high-end 2-in-1 devices from gaming enthusiasts.

NVIDIA (NVDA) and Advanced Micro Devices (AMD) witnessed strong demand for their high-end gaming GPUs (graphics processing units) that support VR (virtual reality). As VR gains popularity, more and more PC gamers will likely upgrade their PCs that support VR.

This was visible from IDC’s (International Data Corporation) 2Q16 data. According to the data, PC shipments fell 4.5% YoY in calendar 2Q16—compared to the expected decline of 7.4%. It was far less than the 11.5% YoY decline witnessed in calendar 1Q16. Intel’s key customer Hewlett-Packard (HPQ) reported 5.1% YoY growth in PC shipments in calendar 2Q16.

The IDC expects that the end of free Windows 10 upgrades by Microsoft (MSFT) might encourage some users to buy new PCs in the current quarter.

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Operating profit

On the profitability front, CCG’s operating profit grew 19% YoY to $1.9 billion in fiscal 2Q16 as the company exited the tablet processor business. The operating profit grew 34.6% YoY in fiscal 1Q16. The profits are growing significantly despite revenue declines as PC ASPs are rising and the company is lowering its spending on PCs.

Guidance

Intel expects the CCG to report a high single-digit decline in fiscal 3Q16. However, it expects to improve profits with the right product mix and ASP.

Next, we’ll look at Intel’s mobile business—it’s part of the CCG.

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