What is driving Intel’s profit margins?
In the previous part of this series, we saw that Intel (INTC) reported record-high revenues in 3Q16 thanks to better-than-expected demand in the PC space. Other than higher revenues, the company has been undergoing major restructuring by slashing jobs, spinning off non-core businesses, and streamlining spending on high-growth areas. All this helped the company report higher profit margins in 3Q16.
However, things may cool a little in 4Q16, and revenues and profits may fall slightly as Intel’s distribution pipelines lower their inventory.
As seen from the chart above, Intel’s margins are higher in 3Q and 4Q as seasonal demand improves factory utilization. Its non-GAAP[1. generally accepted accounting principles] gross margin rose from 63% in fiscal 3Q15 to 64.8% in fiscal 3Q16. This shows that the company enjoyed a better-than-expected season.
Intel’s gross margin was better than rival TSMC’s (TSM) gross margin of 50.7%. Intel’s higher gross margin was due to cost benefits arising from its 14nm (nanometer) node and improved factory utilization. Intel’s foundry has partnered with ARM Holdings (ARMH) to manufacture ARM-based chips. This would help Intel improve its factory utilization, improving its margins.
However, Intel’s gross margin may take a hit in 4Q16 as the company transitions to the 10nm node. The company could see a delay before it can realize the cost benefits. Intel expects its gross margin to fall slightly to 63% in 4Q16 and improve in 2017.
In 3Q16, Intel’s non-GAAP operating income grew 18% YoY to $5.1 billion. The company’s operating margin rose to 32%, the highest in six quarters, which is a result of Intel’s restructuring efforts.
The company expects its operating expenses to increase 2% sequentially to $5.2 billion in 4Q16 as it increases R&D (research and development) spending. A decrease in revenues and gross margin, as well as an increase in spending, could reduce the company’s operating margin to ~30% in 4Q16.
In fiscal 3Q16, Intel’s non-GAAP EPS (earnings per share) rose 21% YoY to $0.80, beating the analyst estimate of $0.73 by 10%. The company didn’t provide any EPS guidance, but the analysts expect it to report EPS of $0.75 in 4Q16.
Next, we’ll look at the company’s node manufacturing roadmap and its impact on its margins.