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Are Intel’s Restructuring Efforts Visible in Its Operating Margin?

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Intel’s earnings growth

At its 2017 Analyst Day, Intel’s (INTC) chief executive officer, Brian Krzanich, stated that the company aims to grow its revenues in the low single digits, its operating income faster than revenues, and its EPS (earnings per share) faster than operating income over the next three years. The company looks to achieve these targets by improving its operational efficiency.

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1Q17 operating margin

Intel started a restructuring program in 2016, which saw its non-GAAP[1. generally accepted accounting principles] operating margin improve from 24.0% in 1Q16 to 26.3% in 1Q17.

The company reduced its SG&A[2. selling, general, and administrative] expenses and increased its R&D (research and development) expenses in areas where returns are high. A major portion of this R&D expense is being spent on the Data Center Group, which would reduce the group’s operating margin in fiscal 2017.

Advanced Micro Devices (AMD) reduced its operating expenses by channelizing its R&D expense in high-performance computing products that generate higher margins.

2Q17 operating margin guidance

Intel expects its operating margin to improve to 26.8% in 2Q17, as its operating expenses are expected to decline faster than revenues. Its revenues are expected to decline 3.0% sequentially, and its operating expenses are expected to decline 3.7%.

EPS

In 1Q17, Intel’s non-GAAP EPS (earnings per share) increased 22% YoY (year-over-year) to $0.66 as its operating margin expanded. Intel earned $235 million in pre-tax profit from the sale of some of its interests in the Netherlands-based ASML.

Intel expects its EPS to increase 3% sequentially to $0.68 in 2Q17 as it realizes a pre-tax gain of ~$375 million from the sale of a 49% stake in its security business.

Next, we’ll see how the improved margins could impact Intel’s cash flows.

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