For years, Intel (INTC 1.29%) has seemingly been burdened by the fact that more than half its revenue and an even larger proportion of its chip manufacturing scale has come from its client computing group (CCG), the Intel business unit that generates most of its revenue and profits from the sale of processors that go into personal computers.
Unfortunately for Intel, the personal computer market has been on the decline for quite some time as personal-computer upgrade cycles have lengthened and consumers have shifted many of their crucial computing tasks to smartphones -- devices that Intel doesn't make processors for.
Image source: Intel.
As Intel has seemingly accepted the reality that the personal computer market is on the decline, it has shifted its focus in this area away from investing for growth and toward trying to maximize profitability.
The financial performance of Intel's CCG in 2017 was quite good, and seemed to be a perfect example of Intel's long-term goal for this business. Let's dive into the details, shall we?
Revenue up, profits way up
Intel reported $34 billion in CCG revenue during 2017, which was up about $1.1 billion -- or around 3.3% -- from the levels that it saw during 2016.
Now, it's worth noting that Intel breaks CCG revenue down into two buckets -- "platform" and "adjacency."
Platform revenue simply refers to the revenue that Intel's CCG generated from selling processors and accompanying platform controller hub chips (the latter chip is often integrated onto the same package as the former).
The adjacency revenue refers to components like Wi-Fi chips, Thunderbolt controllers, and even cellular modems for smartphones.
For some context, platform revenue within CCG was $31.23 billion in 2017, while adjacency revenue was just $2.78 billion. These represented 1.5% and 28.7% year-over-year increases, respectively.
Though CCG revenue was up just slightly -- an impressive feat given the declining personal computer market -- CCG operating profit grew by more than 21% to $12.92 billion.
Intel's strategy of running the business with an eye toward maximizing profitability is quite obviously paying off.
Where does it go from here?
For 2018, Intel says that its current financial guidance contemplates a "low single-digit" decline (that translates to 1% to 3%) in personal-computer related revenue compared to the levels seen in 2017.
That forecast is likely based on a combination of Intel's internal estimates formed through conversations with key personal computer makers, as well as some consideration of third-party market estimates.
Though I wouldn't be surprised to see Intel's CCG post a low single-digit revenue decline in 2018, my guess is that Intel is going to try to outperform that expectation.
Image source: Intel.
Intel doesn't have a ton of control over how many personal computers ultimately get sold in a year, but it can control the products that it introduces, and it can work with its partners to try to influence consumers to buy more-expensive computers.
To put things into perspective, while Intel did enjoy 5% growth in notebook processor shipments during 2017, it also saw 2% growth in the average selling price of the processors that it sold into notebook computers.
That increase in average selling price was probably driven by notebook computer buyers opting to purchase, on average, higher-end devices with more-expensive Intel processors inside.
To the extent that Intel can influence this phenomenon across both notebook and desktop computers, the better the company's odds are of beating its current expectations of a 1% to 3% decline in personal-computer related revenue during 2018.
