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3 Takeaways From Intel Corp.'s 10-Q Filing

For a few quarters now, chipmaker Intel (NASDAQ: INTC) has released its form 10-Q filings virtually in tandem with its earnings press release. This is a welcome change from Intel's previous practice, which had investors waiting for quite a while after the earnings press releases to see all the details the company provides in its quarterly regulatory filings.

After going through Intel's most recent quarterly filing, I came across three pieces of information that were particularly enlightening.

Image source: Intel.

10nm start-up costs weighing on DCG profits

Earlier this year, Intel announced that its data-center group (DCG), which supplies processors and other components into areas such as cloud computing, enterprise servers, and networking, would be the first to use the company's latest chip-manufacturing technologies.

That change wasn't just a strategic one whose impact wouldn't be seen for a few product cycles -- it's had a real financial impact. In Intel's latest 10-Q filing, Intel said that year-to-date operating income in DCG was negatively affected to the tune of $555 million compared with last year, thanks to what Intel says are "higher factory start-up costs" that are "primarily driven by the ramp of ... 10nm process technology."

This means Intel's DCG business unit is now shouldering virtually the entirety of the costs associated with bringing the company's first 10nm factories online -- just as the company told investors it would back in February.

Now, the good news is that while DCG bears this burden, Intel's client-computing group, which supplies processors into the PC market, is relieved of it. 

14nm yield improvements significantly boosted profits

While on the topic of chip-manufacturing technology, Intel's 10-Q had some great news about Intel's 14nm technology, which first went into production in the middle of 2014. By the end of 2015, a large portion of Intel's client processor shipments had migrated to 14nm from the older, more mature 22nm. Today, the vast majority of Intel's processors are built using some derivative of its 14nm technology. 

Since 14nm yield rates -- that is, the percentage of chips produced that prove salable -- weren't particularly great in 2015, Intel's gross profit margin suffered from the 22nm-to-14nm transition. In 2016, 14nm yield rates improved, which led to margin improvements for the company. So far this year, Intel seems to have enjoyed even more yield rate improvements. The company says that year over year, it enjoyed a $930 million boost to gross profit thanks to "lower platform unit cost, primarily on 14nm cost improvement."

What this means is simple: Yield rates got better, which lowered the effective per-chip manufacturing costs for products built using its 14nm technology. That cost-structure improvement meant that Intel was selling chips for roughly the same prices, but they are cheaper to make, meaning that its profitability per chip increased.

Notebook chip increases offset desktop chip declines

Intel says that year to date, it has seen its desktop processor shipments decline 4% from a year ago, which led to $482 million lower revenue from the same period a year ago. However, that decline was more than offset by several factors.

Image source: Intel.

First, Intel says an increase in notebook processor unit sales of 5% led to a revenue boost of $657 million from a year ago. That increase alone more than offset the decline in desktop chip shipments. But it gets better from here.

Intel also says it saw a $571 million increase in sales, thanks to a 4% increase in the average selling prices of its notebook chips. That increase, Intel says, was due to shipping a richer mix of processors. In other words, customers, on average, bought more expensive chips.

Put simply: A surge in Intel's notebook processor shipments and average selling prices year to date more than compensated for the unit shipment declines that Intel saw in its desktop processor business.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.