Why Intel managed to beat its own gross margin expectations

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The PC refresh cycle helped Intel beat Q2 earnings expectations (Part 5 of 6)

(Continued from Part 4)

Intel’s gross margins increased 5% in Q2 quarter over last quarter

In the prior parts of this series, we discussed Intel’s (INTC) Q2 2014 earnings and growth. According to Intel’s press release, the company managed to increase its gross margins by about 5%, from 59.6% in Q1 2014 to 64.5% in Q2 2014. Gross margins were even better than the company’s own original estimate of 63%. The company now expects its gross margins for the third quarter to be around 66%, and it foresees 63% for full-year 2014. Full-year gross margins of 63% are better than the company’s own initial prediction of 61% during the first quarter earnings announcement.

So how did Intel manage to beat its own expectations for gross margins? Let’s analyze the reasons below.

Main reasons for the gross margins increase

In its press release, Intel said the main reasons for its gross margins of 64.5% for the second quarter were:

  • +1.0%: Higher platform volumes
  • +1.0%: Lower platform unit costs
  • -0.5%: Tablet impact

By “platform,” Intel means the microprocessors and chipsets it supplies under the PC Client Group and Data Center Group. Clearly, Intel’s gross margins benefited from better-than-expected PC sales. According to a report from Gartner, worldwide PC shipments increased 0.1% in the second quarter after eight quarters of consecutive decline. According to another report from IDC and as the above chart shows, Lenovo (LNVGY) leads the PC market, followed by HP (HPQ), Dell (DELL), and Acer (ACEYY).

Tablets had an impact of -0.5% on Intel’s gross margins. This is understandable. Tablet chipsets are priced lower than PC chipsets or server chipsets. As Intel looks to increase its presence in the tablet market, its gross margins will have an even more negative impact.

Continue to Part 6

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