Here’s Why the Operating Profit of Intel Soared

Intel Corporation (NASDAQ: INTC) recently reported its earnings results for the third quarter of the fiscal year. The microprocessor titan generally reported robust financial results, but one of the highlights is that the operating profit of the client computing group significantly surged on a year-over-year basis.

During the same quarter last year, the client computing group posted operating profit of $2.433, reflecting a massive decline from the $3.053 billion operating profit that it achieved in 2014. For the current fiscal year, not only did the segment make up for the plunge, but it actually managed to surpass the profit levels reached during the same quarter in 2014.

According to the EVP of manufacturing, operations, and sales of Intel Mr. Stacy Smith, the growth is due to lower product costs, improved revenue, as well as lower levels of investment.

The client computing group generated higher revenue last quarter compared to the year-ago quarter. The sales of the segment edged higher from $8.506 billion in the year-ago quarter to $8.892, and greater revenue translates into higher profits.

Aside from that, in 2015 the microprocessor company transitioned a huge chunk of the products that it sold into the PC market from its 22-nanometer manufacturing technology to the newer 14-nanometer technology.

Even though this transition aided the company in terms of providing better products for desktops and notebooks, Intel experienced substantial manufacturing yield headwinds in attempting to manufacture chips on this newer technology. With this, the chip manufacturing costs edged higher and adversely affected the gross profit margins of the company.

After a year, the 14-nanometer manufacturing technology became more mature and the manufacturing yields have significantly ramped up. This is evident as the product costs lowered and the year-over-year gross profit margins have been improved. Eventually, this has supported the operating profits of the segment.

Lastly, the microprocessor company revealed a dramatic restructuring program in the month of April this year, which is aimed at lowering the operating expenses of Intel substantially. Since the company pointed out that it actually intended to boost its investments in areas with more rapid growth such as the non-volatile, data center, and Internet of Things segment, it is likely that the huge portion of the cost-cutting came from the client computing group.

Indeed, the management of Intel specifically noted that one of the catalysts for growth in the client computing group’s operating margin was that the investment levels dipped.

Despite all these positive news and the solid profit growth throughout this year, it is important to note that this substantial growth in profits relative to revenue has been primarily due to factors that only come into play once.

With this, it is possible that in the long run, the client computing segment will experience flat revenue and a pretty stable operating income.

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