Newsletter portfolios holding Intel (INTC) reported solid results in the second quarter of 2015 on July 15, beating consensus estimates for both revenue and earnings per share. Revenue of $13.2 billion declined 5% from the year-ago period, and earnings-per-share was flat at $0.55. Net income dropped 3% in the period on a year-over-year basis. Though gross margin decreased 2 percentage points to 62.5% from the year-ago period, it was above the 62% midpoint of management’s guidance. The company is executing well against its strategies, but its business is not immune to economic trends.
Weak global PC demand has had an impact on Intel’s results. The firm’s Client Computing Group, a combination of its former PC Client and Mobile and Communications Groups, reported revenue of $7.5 billion, down ~14% from the year-ago period. Operating profit for the group, the company’s largest in terms of revenue, dropped 38% from $2.6 billion to $1.6 billion. Desktop and notebook platform volumes both dropped in the period, at rates of 22% and 11%, respectively, while tablet volumes grew 11%. Average platform selling prices declined 3% in the quarter. Growth in the firm’s data center, memory, and Internet of Things (IoT) helped to offset the poor performance of PC related operations, accounting for more than 70% of operating profit in the period.
The Data Center Group, which includes server, network, and storage platforms segments, was the company’s best performing group in the second quarter. It recorded revenue of $3.9 billion in the period, an increase of ~10% on a year-over-year basis due to both platform volumes and average selling prices advancing 5% in the period. Operating income in the group was flat at ~$1.8 billion, despite the strong revenue gains, due in part to higher input costs.
Also advancing revenue in the period was the company’s Internet of Things Group, which grew revenue by ~4% to $559 million. Operating income for the group was flat at $145 million. The firm’s software and services segment reported revenue of $534 million in the quarter, a 3% decrease from the year-ago period. This segment is not as profitable as the similarly sized IoT Group, as it reported operating income of only $14 million in the period, down from $19 million in the second quarter of 2014. These groups are not as material to operating results as the Client Computing and Data Center Groups, but we think there is noteworthy growth potential in the Internet of Things Group.
Though revenue guidance was cut from flat to a decline of 1% for full-year 2015, gross margin guidance was raised to 61.5% from 61%; guidance for R&D and MG&A was also increased $100 million to $19.8 billion. The firm also refined its spending budget by cutting its capital-expenditure expectations by $1 billion to $7.7 billion. Intel is looking for the launch of its most recent processor “Skylake” to provide exciting new PC experiences in the second half of 2015. The Microsoft Windows 10 and other new OEM systems will also help.
We aren’t anticipating a large improvement in Intel’s PC-related operations in the back half of 2015, but an improvement is probable. Management’s guidance of revenue declining 1% for the year allows for slight improvement in top-line results from the first half. We expect full-year results to reflect management’s guidance as Intel navigates the changing demand of the PC world. Though we’re not pleased with declining year-over-year performance, we will continue to hold the company in both newsletter portfolios. Intel yields 3.2% at the time of this writing.