Intel's Mixed Q2 Financials Show Data Center Growth, PC Contraction

Second-quarter financials released by Intel Wednesday illustrated the company's ongoing effort to transform its technology portfolio to prioritize data centers and connected devices over personal computers.

Intel's data center group , encompassing products sold to enterprises as well as cloud and telecom providers represents the primary focus of the company's restructuring and continued gaining share across the overall business with 5 percent growth on $4 billion in revenue.

"In the data center we’re seeing an ongoing preference for performance up and down the product stack," Krzanich said.

Sales to cloud service providers were up 9 percent, while enterprise revenue—the division's primary driver—actually fell by a point, though also stabilized in the quarter, Krzanich said.

Sponsored post

[Related: Solution Providers: SoftBank’s ARM Buy Will Put Pressure On Intel’s IoT Play]

The cloud growth was actually a deceleration from previous quarters—in line with a pause in purchasing the company forecast based on the buying patterns of the big cloud players, Krzanich said. Intel expects that revenue stream to gain steam again in the second half of the year.

"These guys don’t build out their data centers in a linear fashion," Krzanich said of the large cloud providers. Instead, those mega-customers buy Intel's CPU, memory and networking products at a lumpy pace as they build to overcapacity, then go out and sell to those limits.

But Intel believes the cloud business will continue to expand, "driven by many machines that connect to the cloud, that drive order of magnitudes more data than humans create today," Krzanich said.

Those connected machines, the Internet of Things, were the source of $572 million in quarterly revenue—a drop of 12 percent from the previous quarter for the group, and gain of 2 percent year-over-year.

While IoT sales fell below expectations, partly because of an inventory burn following a strong first quarter, Intel continues "to see tremendous potential in this business" which remains an integral part of the company's restructuring strategy.

"Billions of smart, connected devices" will yield a dramatic surge in data usage in the coming years, he said, and Intel is prepared to seize that opportunity.

Consumers using apps on their smartphones, self-driving cars, drones, video services and ultimately virtual reality are going to amplify data consumption radically by 2020.

Users are going to need to store all that data, and apply machine learning to analyze it, which Krzanich said tells him the cloud will continue to grow.

The Santa Clara-based chipmaker’s $13.5 billion in second-quarter revenue—representing 3 percent year-over-year growth—was as the company expected, even as Intel surprised itself with GAAP gross margins of 58.9 percent (61.8 percent non-GAAP), that delivered better-than-expected profits, Krzanich said.

But the top-line result fell short of analysts' expectations of $13.54 billion for the quarter ended June 30. A 6-cent beat on earnings per share of 59 cents didn't prevent the stock from slipping roughly 3 percent in after-hours to $34.53 a share at publication time.

The data center business kept the company on a positive track as sales to PC vendors continued to falter.

Intel's client computing group, which addresses the PC market, saw a 3 percent decline in revenue, sequentially and year-over-year, with an operating margin of 19 percent. That was better performance than the company actually expected, partly thanks to some supply chain dynamics.

Intel remains cautious about PC sales going into the second half of the year, expecting a continued single-digit decline on that side of the business in the third quarter as all other divisions are predicted to enjoy double-digit growth.

CFO Stacy Smith told investors the company forecasts a midpoint of $14.9 billion in sales in the coming quarter, with a midpoint gross margin expectation of 62 percent.

Smith also Intel followed through on its downsizing goals by reducing its workforce by 6,000 employees in the second quarter.