Intel operating margins drop in Q3 2020 despite rising PC sales

What you need to know

• Intel Corp's operating margin dropped by 8 percent in the third quarter of this year.
• The dip is related to the fact that people are buying cheaper PCs that yield a lower profit margin.
• Intel's data-center business fell by 7 percent in the same quarter.

Intel Corp's profits margins dropped last quarter even though the company saw a rise in total PC sales. According to FactSet via US News, sales in Intel's PC group hit $9.8 billion during the quarter, which beat analyst estimates of $9.09 billion. Despite beating analyst expectations, Intel's operating margins dropped to 36 percent, down from 44 percent in the third quarter of 2019.

Experts believe that as more people work from home, the PC market shifts towards less powerful PCs. Rather than grabbing powerful desktops, people have moved to more affordable PCs that can get work done from home. Cheaper PCs have smaller profit margins than more expensive computers, so Intel's profit margins dipped as a result.

Intel Chief Financial Officer George Davis told Reuters, "You're seeing the demand shift from desktops and higher-end enterprise PCs to the entry-level consumer and education PCs." Davis added, "Even though the volume is good, your (average selling prices) are coming down, so that impacts your gross margins a little bit."

Davis mentioned a similar drop in the data center business. Government and business customer spending fell 47 percent in that area. As a result, Intel's operating margins dropped to 32 percent, down from 49 percent. Revenue in Intel's data-center business also fell by 7 percent. Intel's data-center business revenue in the third quarter was $5.9 billion, which falls short of the $6.21 billion expected by analysts.

Following the news of the lower margins, Intel stocks dropped 10 percent.