Intel Adjusts to Weak PC Demand
The firm’s move to lower its capital spending budget is a good sign that management is able to tactically adapt to challenging environments.
First-quarter revenue for Intel was $12.8 billion, down 13% sequentially and flat year-over-year. Intel’s newly titled client computing group, which combines the mobile and PC groups, had revenue of $7.4 billion, down 8% year-over-year as desktop volumes were down 16% on lower enterprise demand. Data center revenue was up 19% year-over-year, with unit volumes up 15% and average selling prices up 5% as cloud growth accelerates. Gross margin was down 4.9% sequentially to 60.5% due to higher unit costs stemming from a higher mix of 14-nanometer product, lower platform volumes, and higher factory start-up costs. Diluted EPS was $0.41, up 8% from a year ago, thus illustrating solid growth driven by strong server demand.
Management outlined their logic behind the cut in capital expenditures and lower second quarter guidance as reacting to inventory depletion in the PC supply chain in preparation for the release of Microsoft’s Windows 10 operating system and Intel’s Skylake microarchitecture in the second half of 2015. The combination of lower expected capital investment and full year gross margin (61% versus prior guidance of 62%) leave our free cash flow estimate relatively intact despite a tough start, as we expect a stronger second half, especially in the PC segment.
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