Intel (INTC) has improved its revenue and profit margins over the last three years while transitioning from a PC-centric company to a data-centric company. Delivering more returns by spending less has improved its operating leverage.
Intel has restructured its R&D (research and development) efforts toward the high-growth AI, 5G, autonomous driving, 3D XPoint memory, and IoT (Internet of Things) technologies. It’s accelerated its efforts in these areas organically and through acquisitions (Altera and Mobileye) and joint ventures, thereby improving its total addressable market from $220 billion to more than $300 billion by 2021.
Intel has also reduced its costs by divesting or spinning off its low-growth Wind River, Saffron, wearables, and McAfee security businesses.
Operating expense ratio
In the last three years, Intel has increased its revenue by $15.5 billion and its operating expense by less than $250 million, reducing its operating expense ratio by about seven percentage points to 28.6% in 2018. It met its long-term target of a 30% operating expense ratio two years ahead of schedule.
Rival Advanced Micro Devices (AMD) has also refocused its R&D efforts on its CPU (central processing unit) and GPU (graphics processing unit) road map to maximize revenue from minimal expenses. It improved its operating expense ratio from 34% in 2015 to an estimated 28.5% in 2018.
In the fourth quarter of 2018, Intel reduced its non-GAAP (generally accepted accounting principles) operating expense ratio by 310 basis points YoY (year-over-year) to 26.7%. Intel’s operating expense is high in the first quarter because it includes employee benefits and compensation. Hence, its operating expense ratio is expected to increase 20 basis points YoY to 32.6% in the first quarter of 2019.
Improved operating leverage increased Intel’s operating profit by 10% YoY to $6.6 billion and its EPS by 18% YoY to $1.28 in the fourth quarter of 2018. Its EPS rose faster than its operating profit in the quarter as it benefited from a lower tax rate and a reduced share count due to its $10.7 billion share buyback.
In the first quarter of 2019, Intel expects its EPS to remain flat YoY at $0.87, missing analysts’ expectation of $1.01.
Next, we’ll see how Intel has used its profits and cash flows.