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Intel's Client Computing Group Getting Firmer Support From Other Segments in 3rd Quarter

- By Sangara Narayanan

Intel Corp. (INTC) reported stronger than expected third quarter results with revenues growing by 9% year over year. All the three important segments, Client Computing Group, Data Center Group and Internet of Things Group reported strong numbers, helping Intel's third quarter top-line numbers.

The big surprise this quarter was the growth in the Client Computing Group. An even bigger surprise was its expansion of operating margins. Client Computing Group's fortune is directly tied to the PC market, which has been declining for the last few years. The expectation was therefore low for this segment. But Intel's move to put its weight behind improving processes and reducing costs seems to have helped the group immensely.


Operating margin for Client Computing Group increased from 28.6% in the third quarter last year to 37.4% this year. Revenue from Client Computing Group has also expanded, from $23.46 billion in the first nine months of last year to $23.78 billion this year. Impressive, considering the state of PC market. Intel attributed the expansion to increasing demand and inventory build-up in the PC market.

But it is too early to jump for joy and claim that CCG's sales growth is here to say. The margin improvement is certainly commendable, but the PC industry is still very much on the wane. At best, it can offer stable numbers, but not even stable growth.

Intel itself agrees with this scenario, and is moving steadily to reduce its dependence on the PC market by leaning on a more dependable cloud business.

"It's an extremely exciting time in the company's history as we transition from a PC-centered company to one that powers the cloud in billions of smart connected devices, Intel CFO Bob Swan said in its third quarter earnings statement.

It is obvious the company is now leaning more towards its IoT and Data Center Groups for the future, and the good news is that both groups continue to grow. As cloud-based delivery systems grow, there will be increasing demand for cloud, networking and storage products -- areas in which Intel is actively enhancing its expertise.

Data Center Group reported revenues of $4.5 billion, up 10% over the third quarter last year. This will likely be the segment that carries Intel's top line numbers in the near future, not Internet of Things -- and definitely not Client Computing Group, which should play the holding game for now.

The sooner the IoT segment, which grew by 19% this quarter, and Data Center segment catch up with the Client Computing Groups numbers, the better it will be for the company. In the third quarter, IoT and Data Center Groups had combined revenues of $5.23 billion compared to $8.89 billion from Client Computing Group.

Both segments are steadily growing, but they are still at least a year away from dislodging CCG group from the top spot. That will be the tipping point for Intel in more ways than one.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.


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