Intel (INTC Quick QuoteINTC - Free Report) reported second-quarter 2021 non-GAAP earnings of $1.28 per share, which beat the Zacks Consensus Estimate by 20.8% and improved 12.3% year over year.

Revenues (excluding NAND memory business) totaled $18.53 billion, up 1.9% year over year. GAAP revenues were $19.63 billion, down 0.5% year over year but comfortably outpaced the consensus mark by 10.7%.

Intel’s top line surpassed its expectation by $700 million driven by stellar performance from the PC business and solid recovery in the Internet of Things business as well as the enterprise portion of the data center segment.

However, Intel’s shares were down 2.6% in after-hours trading as the results failed to impress investors.

Segment Revenue Details

Client Computing Group or CCG (51.5% of total revenues) revenues were up 6.5% year over year to $10.11 billion.

Platform revenues increased 14.2% year over year to $9.40 billion. Adjacent revenues plunged 43.8% from the year-ago quarter to $712 million.

PC volumes jumped 33% on a year-over-year basis. Notebook platform volumes surged 40% year over year but declined 8% sequentially. Desktop platform volumes increased 15% year over year and 3% sequentially.

Notebook’s average selling price (ASP) declined 17% year over year on account of increase in volumes across consumer entry and education segments. On a sequential basis, Notebook ASP increased 6%. Desktop ASP declined 5% and 3% on a year-over-year and sequential basis, respectively.

The company launched 12 new processors, including 11th Gen Intel Core with Intel Iris Xe graphics and Intel Xeon W-11000 series processors. Intel announced partnership with Microsoft (MSFT Quick QuoteMSFT - Free Report) to include its Bridge Technology to deliver better mobile experience on Windows-powered PCs.

Intel shipped more than 50 million units of Tiger Lake in the reported quarter.

Data Center Group or DCG (32.9%) revenues declined 9.3% year over year to $6.46 billion.

Platform revenues were down 7.7% year over year to $5.70 billion. Adjacent revenues fell 19.7% from the year-ago quarter’s levels to $752 million.

DCG platform unit volumes were down 1% year over year but up 12% sequentially. ASP declined 7% year over year but increased 5%.

Cloud service providers or CSP revenues declined 20% year over year but increased 18% sequentially. Intel’s Ice Lake processors witnessed rapid adoption with services offered by Alibaba (BABA Quick QuoteBABA - Free Report) , Baidu, Microsoft, and Oracle (ORCL Quick QuoteORCL - Free Report) .

Revenues from Enterprise & Government increased 6% and 14% on a year-over-year and sequential basis, respectively. Revenues from Communication service provider fell 6% year over year but declined 16% sequentially.

Internet of Things Group revenues (6.7% of total revenues) surged 60.7% year over year to $1.31 billion. IOTG revenues increased 46.9% from the year-ago quarter to $984 million.

Mobileye revenues soared 124% on a year-over-year basis to $327 million. The company clinched 10 new design wins in the second quarter.

Non-Volatile Memory Solutions Group or NSG (5.6%) revenues declined 33.8% year over year to $1.10 billion on lower ASPs.

Programmable Solutions Group or PSG (2.5%) revenues slumped 3% from the year-ago quarter’s levels to $486 million, due to enterprise and cloud inventory digestion.

Intel has a residual segment, All Other (0.9%), which includes results of operations from other adjustments. The segment reported revenues of $172 million, up 23.7% year over year.

Notably, DCG, Internet of Things Group, NSG, PSG and All Other business units form the crux of Intel’s data-centric business model. Revenues from the data-centric businesses were $9.52 billion (48.5% of total revenues), down 6.9% year over year.

Operating Details

Non-GAAP gross margin was 59.2%, up 290 basis points (bps) on a year-over-year basis driven by improved mix and strong top-line growth.

Non-GAAP Research & development (R&D) expenses, and Marketing, General & Administrative (MG&A) expenses as percentage of revenues increased 270 bps year over year to 26.1%.

Non-GAAP operating margin expanded 60 bps on a year-over-year basis to 31.6%.

CCG operating margin expanded 730 bps year over year to $37.2% driven by higher revenues, lower inventory reserves, and reduced 10-nanometer costs.

DCG operating margin was 30.1%, significantly down from 43.5% reported in the year-ago quarter.

Internet of Things Group operating income amounted to $396 million compared with $66 million reported in the year-ago quarter. Mobileye’s operating income was $109 million against year-ago quarter’s loss of $4 million.

NSG group’s operating margin expanded to 36.6% from 19.4% reported in the year-ago quarter. PSG operating margin expanded 90 bps year over year to 16.9%.

All Other segment reported a loss of $1.04 billion compared with a loss of $712 million in the year-ago quarter.

Balance Sheet

As of Jun 26, 2021, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $24.9 billion compared with $22.4 billion as of Mar 27, 2021.

Total debt as of Jun 26, 2021, was $35.4 billion compared with $35.9 billion as of Mar 27, 2020.

In the second quarter, the company paid out dividends worth $1.4 billion.

Intel generated $8.8 billion in cash from operations, up from $5.5 billion in the first quarter. Free cash flow was $5.1 billion.

Guidance

For third-quarter 2021, Intel expects non-GAAP revenues of roughly $18.2 billion, indicating 5% growth from the year-ago reported figure.

The Zacks Consensus Estimate is pegged at $18.31 billion, suggesting a decline of 0.1% from the year-ago quarter.

Industry-wide shortage in components is expected to hurt CCG revenues on a sequential basis. Intel expects supply shortages to persist for several quarters but hurt clients most in the third quarter.

Intel expects to ship several million units of Alder Lake to customers in the second half of 2021. Meteor Lake remains on track for production in 2023.

In data center, management expects enterprise and government as well as Cloud to show further improvement.

Non-GAAP gross margin is anticipated to be around 55% for the third quarter, down 150 bps due to expenses related to 7-nanometer and the Meteor Lake product initiatives.

Non-GAAP earnings are expected to be $1.10 per share, indicating 2% growth from the year-ago quarter. The consensus mark for earnings stands at $1.08 per share, suggesting a decline of 2.7% from the prior-year reported figure.

For 2021, Intel now expects revenues to be around $73.5 billion compared with $72.5 billion projected earlier in April 2021. The figure is expected to increase 1% year over year.

This Zacks Rank #2 (Buy) stock expects DCG to grow sequentially, achieving double-digit year-over-year growth in the second half of 2021. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Non-GAAP earnings are expected to be $4.80 per share compared with $4.60 per share forecast earlier in April 2021. The figure is expected to decline 6% year over year.

Non-GAAP gross margin is still anticipated to be around 56.5% for the 2021.

Capital spending for the year is expected to be $19-$20 billion. Non-GAAP free cash flow is now projected to be $11 billion for 2021.