On July 27, microprocessor giant Intel (NASDAQ: INTC) reported its financial results for the second quarter of the year, offered guidance for the third quarter, and even raised its full-year revenue and profit guidance.
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Central to this strong quarterly performance and raised full-year guidance was higher-than-expected revenue from sales of personal computer processors, which helped to lift the company's Client Computing Group (CCG) operating segment.
CCG generated $8.21 billion in revenue this quarter and operating profit of $3.03 billion. Both figures were up substantially from the $7.33 billion in revenue and $1.91 billion in operating profit seen in the same quarter a year ago. Those represent year-over-year growth rates of 12% and about 58%, respectively.
Let's take a closer look at this performance and what drove it.
Great CCG revenue, starring notebook processors
In this most recent quarter, Intel says that it saw shipments of notebook platforms grow 14% year over year (Intel says that "platforms incorporate various components and technologies, including a microprocessor and chipset, a stand-alone [system-on-a-chip], or a multi-chip package").
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Additionally, notebook average selling prices were up 6% year over year.
So not only is Intel seeing much greater demand for notebook platforms than it did a year ago, but customers are buying more expensive platforms on average.
The performance of Intel's desktop personal computer business, on the other hand, wasn't quite as inspiring. The company says that desktop platform volumes, as well as desktop platform average selling prices, each dropped by 1% year over year in the quarter.
In Intel's accompanying CFO presentation, the company says that desktop revenue was down 3%, so the 1% figures above, as well as the 3% revenue figure, were almost certainly rounded figures.
This trend isn't that surprising; consumers have been shifting their computing needs away from stationary devices to portable devices for quite some time. As laptop personal computers have become more powerful and portable over time (high-end gaming notebooks now have a tremendous amount of processing power), the value proposition of bulky, stationary desktop personal computers has steadily eroded.
Co-starring non-CPU products
The bulk of Intel's CCG revenue comes from sales of platforms, but the company also generates a significant amount of non-platform components. Those components include things like LTE modems and Wi-Fi/Bluetooth connectivity combo chips.
Revenue from these non-platform components in the most recent quarter was $579 million, or just 7% of total CCG revenue. That's not a dig on Intel's non-platform business, but a reflection of just how enormous Intel's personal computer platform business is.
Though a small part of Intel's overall CCG business, the non-platform portion of this business grew 45% year over year.
Intel attributed this to a ramp-up in the shipments of LTE modems, though I wouldn't be surprised if the company also saw strength in Wi-Fi/Bluetooth shipments (Intel has mentioned strength in this segment in the past).
Revenue growth is great, but a profitability boost is even better
The 12% year-over-year growth in CCG was certainly nice, but the 58% surge in profitability was even sweeter. Intel attributed this to "improving 14nm costs, richer product mix, and lower spending." Let's break that down a bit.
The manufacturing cost of a chip is tightly related to the manufacturing yields of said chip, or, put another way, the total number of "good" chips that come off a silicon wafer. Since the cost to produce a wafer of chips (all else, including the chip design, being equal) on a given manufacturing technology is relatively fixed, the cost per chip sold depends on the total number of usable chips produced.
If a silicon wafer costs me $8,000 and I get 50 usable chips off the wafer, then my effective die cost is $160. If I get 150 usable chips, then my cost per chip is only $53.
So, manufacturing yields impact product costs, which impact gross profit margins, which ultimately affect operating profit.
The "improving 14nm" costs here likely means that Intel's yield rates on its 14-nanometer technology are continuing to improve.
The "richer product mix" refers, in effect, to the average selling price of its chips. Intel builds a range of personal computer chip products, selling them under their (in order of higher prices and performance) Celeron, Pentium Core i3, Core i5, Core i7, and Core i9 (for high-end desktop only) brands.
What Intel is saying here, then, is that customers on average bought higher-end chips than they did in the year-ago period.
And, finally, "lower spending" refers to the company's operating expenses. Total operating profit depends on both gross profit (how much money a company makes from the sale of a product less manufacturing/material costs) and operating expenses (the money it takes to develop and market products).
By decreasing its operating expenses year over year (via its layoff program announced last year), more of the total gross profit from product sales that Intel generated this quarter fell to the bottom line than it did in the same quarter a year ago.
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