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Intel’s Restructuring Efforts Reflect in Profit Margins


Nov. 30 2016, Updated 11:05 a.m. ET

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.

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Gross margin

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.

Operating margin

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.


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