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Intel Corp (INTC - Analyst Report) reported first-quarter earnings of 38 cents per share, just over the Zacks Consensus Estimate of 37 cents but somewhat lower than guidance indicated. The better than-expected gross margin drove the surprise.

Intel has reported roughly in line with expectations in the last four quarters, so the last quarter was not too different. Guidance was in line with expectations.

Shares were up less than 1% during the day, but appreciated another 1.5% after the company reported.

Revenue

Intel’s reported revenue was $12.76 billion, within the guidance range of 12.8 billion (+/-$500 million) and in line with the Zacks Consensus of $12.8 billion. This was down 7.7% sequentially and up 1.5% from the year-ago quarter.

The company restructured reporting segments, providing historical numbers for comparison-

The PC Client Group, which continues to account for the largest chunk of Intel’s business (62%), now also includes gateway and STB products. The adjusted revenues for the segment are down 7.8% sequentially and 1.4% year over year. The decline from the year-ago quarter is significantly lower than last year, indicating stabilization in the PC market in line with Gartner and IDC observations.

Overall unit volume was up 1%, from the previous and year-ago quarters, with the average selling price (ASP) down 3%. The volume increase was driven by notebooks as desktops were flattish. This is very encouraging since mobile computing revenues have been flat to down in the last seven quarters.

Intel appears to be doing well in the convertible category, where revenues increased 20% according to management. The desktop ASP growth of 4% partially offset the 8% decline in notebook ASP. Desktops continue to gain from improving mix.

Data Center, which generated 24% of quarterly revenue, saw units and ASP up 3% and 8%, respectively from last year, with cloud, networking and storage each up more than 20%. Intel’s dominance in the data center enables it to generate very strong prices here. Last quarter, Intel made a sizeable investment in Cloudera to pick up a major share of the company that develops Hadoop code.

The secular growth drivers are increasing Internet usage by consumers all over the world and the ongoing move towards virtualization and cloud computing.

The new segment Internet of Things Group also includes Intel’s embedded business. The segment accounted for 4% of revenue, down 10.4% sequentially but up 32.1% from last year. Management attributed the increase to in-vehicle infotainment and retail, as well as a doubling in IoT atom revenue.

The Software & Services Group generated another 4%, down 6.4% sequentially and up 6.3% year over year. McAfee saw an 8% increase in consumer sales with record bookings.

The all-important Mobile & Communications Group generated a mere 1% of revenue, but management stated that Intel was on track to achieve the 40 million unit target for 2014. The optimism stems from the 5 million chips shipped in the last quarter and 90 tablet design wins on Android and Windows platforms to date.

Segment revenue was down 52.1% sequentially and 61.4% year over year, which is mostly because the baseband modem business it inherited from Infineon is increasingly being replaced by 4G LTE solutions, where Qualcomm (QCOM - Analyst Report) has taken the dominant share. Intel’s own integrated solutions are yet to make headway.

The Other segment, which comprises Intel’s NAND flash memory products, generated around 4% of revenue, down 8.1% sequentially and up 8.9% year over year.

Margins

The gross margin for the quarter was 59.7%, down 221 basis points (bps) sequentially and up 358 bps year over year, better than the guidance of 59% at the mid-point. The 14nm startup costs appear to be much lower than expected, particularly if you take out the extra $100 charged for litigation. Another factor impacting margins is the contra revenue or subsidy that it is giving to tablet makers for the higher cost of using Bay Trail.  

Operating expenses of $5.09 billion were up 1.4% sequentially and 11.9% from last year. The operating margin was 19.8%, down 581 bps sequentially and 18 bps year over year. There was a very significant 780 bp increase in R&D as a percentage of sales, with along with the 221 bp increase in COGS more than offset the 447 bp decline in MG&A.

The operating margins by segment were as follows—PC Client 35.3% (down 387 bps sequentially), Data Center 42.7% (down 648 bps) and Internet of Things 25.5% (down 1,314 bps). The other segments continued to make significant losses.

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