Intel Kept A Lid On Spending In The Second Quarter

During the second quarter, Intel (NASDAQ:INTC) reported taking in $17 billion in net revenue and $5.3 billion in operating income — figures that were up 15% and 37% year over year, respectively.

This article originally appeared in the Motley Fool.

Interim CEO and CFO Bob Swan highlighted the fact that the chip giant's operating expenses — that's research and development expenses combined with the company's marketing, general and administrative costs — were flat year-over-year at $5.1 billion.

"Total spending as a percentage of revenue [was] down 4.6 points year over year in the quarter, while we continued to increase investment[s] in our key priorities," Swan said. "Versus the second quarter of last year, we delivered $2.2 billion more revenue with no incremental spending."

Although Intel's overall operating expenses were flat year over year, neither its R&D nor its marketing, general and administrative expenses stayed put; the former increased while the latter decreased.

Let's take a closer look at what Intel had to say about the magnitude of and the motivations behind those spending shifts.

The research and development increase

During Q2, Intel spent $3.37 billion on research and development, up from $3.26 billion in the same quarter a year ago. That's an increase of roughly $109 million, or 3.34%.

According to the company's Q2 filing, that rise was due to two factors . The first was "higher investments in data-centric businesses" and the second was "higher profit-dependent compensation due to an increase in net income."

The part about "higher investments in data-centric businesses" isn't too illuminating because Intel's "data-centric businesses" are comprised of four discrete segments: Internet of Things, data center, non-volatile memory solutions, and programmable solutions.

Digging a bit further for clues, we find that Swan said on the call that spending on the Internet of Things group was flat, so it's reasonable to assume that none of those "higher investments in data-centric businesses" went toward IoT.

The marketing, general and administrative decrease

Intel reported that its marketing, general and administrative expenses came in at $1.725 billion during the quarter, a nearly 6.8% year-over-year decline. The chip giant attributed that decrease to two key factors.

The first was "lower expenses due to the [Intel Security Group] divestiture." You may recall that in 2011, Intel bought antivirus software maker McAfee, which it later renamed the Intel Security Group. In September 2016, the chip giant announced that it would spin-out the Intel Security Group into a company called McAfee, and that Intel would keep a 49% stake in the new company.

Next, the company cited the previously announced "change to the Intel Inside program" as a contributor to the company's year-over-year marketing, general and administrative expense declines. You can read more about that change here.

Partially offsetting those two factors was "higher profit-dependent compensation due to an increase in net income.

Tying it all back

Keep in mind that back in April 2017, then-CEO Brian Krzanich told investors that the company was "establishing a spending target of approximately 30% of revenue, which we expect to reach no later than 2020."

"While we expect revenue growth to play a role in achieving these targets, hitting this goal will require spending discipline and an intense focus on our strategic priorities," he said at the time.

Since then, Intel's revenue growth has been far more robust than it had originally expected. When Krzanich made his announcement, the midpoint of the company's revenue guidance was $60 billion; Intel ultimately generated $62.8 billion in sales that year. Moreover, its revenue guidance for 2018 has continued to climb. The company's original target, set back in January 2018, was for $65 billion in sales, but that figure was revised up to $67.5 billion in April and then to $69.5 billion in July.

"Currently, as a result of strong top line growth, we now expect to meet our 30% spending target in 2018, two years ahead of our original expectations," Swan said on the company's April earnings call back. During the company's July conference call, Swan reiterated that the company is "on track to meet that target."

"We remain extremely diligent in managing spending while prioritizing investments in areas that will accelerate revenue growth, product leadership, artificial intelligence, and autonomous driving," Swan explained. "This focused approach is producing results."

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.