Intel Corporation Delivers a Solid Quarter, Yet Again

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Shortly after the market closed on Oct. 14, chip giant Intel reported its third-quarter revenue and profit results, and issued its outlook for the fourth and final quarter of 2014.  Intel reported revenue of $14.6 billion, slightly ahead of sell-side consensus of $14.45 billion (per Yahoo Finance). It also guided to $14.7 billion in sales for the fourth quarter of 2014, again ahead of sell-side consensus of $14.49 billion.

Intel also reported earning $0.66 per share, edging out sell-side consensus of $0.65. Intel's guidance also seems to call for earnings per share of approximately $0.67, which is again ahead of sell-side consensus of $0.62. With the high-level overview in mind, it's worth taking a closer look at what the key themes are here, and what investors should be looking out for during the longer term.

The PC Client Group recovery continues
Intel reported a 9% year-over-year increase in its PC Client Group, or PCG, revenue. Further, thanks to expense cuts, greater PC processor shipments, and higher gross margin, Intel reported that operating profit in PCG rose 27%.

Interestingly enough, Intel saw a 6% year-over-year increase in desktop PC-oriented processors, along with a 2% increase in the average selling prices of those products. This is in stark contrast to what Intel reported for its notebook PC chip shipments, which saw unit volumes up 21% year over year, but average selling prices down 10% during that time.

Intel signaled at its investor meeting last year that it wanted to more aggressively gain share in the lower end of the notebook PC market. Using its low-cost, Atom-based Bay Trail-M products, it seems that Intel has been able to pull it off.

Data Center Group remains a source of strength
While PCG is Intel's largest business, its Data Center Group, or DCG, continues to deliver impressive revenue and profit growth. Intel reported that this division delivered 16% year-over-year revenue growth, and 26% operating profit growth.

What stood out in particular was that Intel saw 6% unit growth in this division, but a 9% increase in average selling prices. This looks to be a continuation of a product mix shift toward higher-value, higher-priced products that Intel's Diane Bryant, who runs DCG, pointed out at last year's investor meeting.  Driving that point home, and illustrating the strength of Intel's competitive positioning, is the fact that operating margin for DCG nearly reached 52% during the third quarter.

Internet of Things Group is small, but it's a highly profitable growth business
Intel recently began breaking out revenue for its Internet of Things ("IoT") group, which sells chips into the "embedded market segment." Examples of such market segments include in-vehicle infotainment systems, point of sale terminals, and intelligent vending machines.

Intel reported revenue of $530 million for its IoT group, which represented 14% year-over-year growth. However, the division's operating profit barely budged, growing from $152 million during the third quarter of last year to $153 million during the most recent quarter.

The flat year-over-year operating profit may signal either gross profit margin compression, or an increase in operating expenses in order to try to capture future growth opportunities. With all of the interesting stuff that Intel has announced around smartwatches, its low-power Quark architecture, and other new potential growth areas, I'd bet that the operating margin compression is due more to increased investments rather than gross-profit-margin pressure.

Mobile looks really ugly
Intel's Mobile and Communications Group ("MCG") saw revenue decline 100% year over year, to just $1 million. The division lost $1.043 billion for the quarter, which represented a widening of the loss from the year-ago period. However, as CFO Stacy Smith pointed out on the earnings call, the company saw the loss narrow quarter over quarter.

The bad news is that this is a really ugly loss. The good news, though, is that Intel has signaled that as it rolls out new tablet products that don't require contra-revenue, and as smartphones using its XMM 7260 LTE-Advanced modem roll out (management pointed to the Galaxy Alpha and the Galaxy Note 4 as wins for this modem), revenue should grow, and the loss should finally begin to narrow during 2015 relative to 2014 levels.

Foolish bottom line
It's encouraging to see Intel's core businesses grow nicely and demonstrate significant year-over-year profit growth. I'm looking for Intel to reaccelerate the profitability of its Internet of Things division, and I'd really like to think that this is the bottom for Intel's mobile group in terms of both revenue and operating loss.

I look forward to seeing what Intel has to say about how it thinks 2015 will play out at its Nov. 20 investor meeting.

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The article Intel Corporation Delivers a Solid Quarter, Yet Again originally appeared on

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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