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Intel Enterprise Data Center Sales Fall As 2019 Outlook Improves

Despite reporting that sales from enterprise and government customers within the Data Center Group declined 31 percent in the second quarter, the chipmaker received a warm reception from Wall Street, with its stock price up as much as 6 percent in after-hours trading Thursday.

Intel CEO Bob Swan said sales from enterprise and government customers within the Data Center Group have been "brutal" as CIOs exercise more caution with digital transformation initiatives following a spending spree last year.

The Santa Clara, Calif.-based chipmaker reported Thursday that its enterprise and government segment declined 31 percent in the second quarter, which contributed to an overall 11 percent decline for the Data Center Group from the same period last year. Revenue for that business was $5 billion in the second quarter.

[Related: Intel To Supercharge SAP Applications In New Multi-Year Partnership]

But despite the challenges in the Data Center Group, Intel received a warm reception from Wall Street after the company upgraded its full-year revenue forecast by $500 million to $69.5 billion and said it was selling a majority of its smartphone modem business to Apple for $1 billion as part of its second-quarter earnings release.

From a quarterly snapshot, Intel also did well. Its second-quarter revenue was $16.5 billion, which marked a 2.7 percent decline from the same period last year but exceeded analyst expectations by $800 million. The company's net earnings were $1.06 per share, surpassing analyst estimates by 22 cents.

Intel's stock price was up as much as 6 percent in after-hours trading on Thursday.

Swan said the company is still expecting a down year, as the chipmaker expressed in the previous quarter, but things are looking a little brighter as a result of higher average selling prices for Intel's Xeon and Core processors as well as strong commercial client sales.

While most of Intel's businesses saw a decline in sales for the second quarter, the company's PC business grew 1 percent to $8.8 billion while its Internet of Things Group grew 12 percent to revenue of $986 million, driven by demand for higher-performance processors. Swan said that the Internet of Things Group’s growth rate was three times the market rate and that the unit is "positioned to significantly outgrow the market over time."

“We are using our architecture accelerators and software assets combined with unmatched scale and partners to deploy one of the industry's fastest-growing IoT portfolios,” Swan said.

Intel's Mobileye autonomous driving business unit also grew by 16 percent to $201 million.

CIOs Exercise Caution As U.S.-China Trade Dispute Creates Uncertainty

As for Intel's enterprise and government customers, Swan said spending is slowing down in 2019 after CIOs ramped up digital transformation projects last year, boosted in part by President Trump's U.S. tax reform that was passed in 2017.

"Our sense is that CIOs, broadly speaking, are a little more cautious," he said.

Another factor impacting enterprise and government revenue is a slowdown in sales from customers in China, according to Swan. He said he doesn’t' expect enterprise and government revenue to improve by a wide margin in the second half of the year.

At the same time, Swan said, he expects sales from cloud service providers and communications service providers to improve in the last six months of the year after cloud spending dragged in the first half due to many providers absorbing capacity for their data needs. This will push faster growth in the second half of the year for the Data Center Group, according to the CEO.

While Intel has been experiencing a slowdown with Chinese customers, Swan said the U.S.-China trade dispute actually boosted second-quarter revenue from customers in China at the same time.

Swan said Chinese customers ramped up purchases in the second quarter for transactions they previously planned in the third quarter because of the uncertainties over whether U.S. tariffs on Chinese imports will increase and whether the U.S. will place more buying restrictions on Chinese customers like Huawei.

"We still have the threat of tariffs going up for goods in China," Swan said.

The CEO said there's still a "lack of clarity" over the implications of the U.S. entity list that has placed buying restrictions on Huawei and other Chinese companies—even though Swan was among the CEOs who met with Trump on Monday to discuss the matter.

While Trump said at the Monday meeting that he would make "timely" decisions on requests for licenses by companies like Intel to sell to blacklisted companies, Swan said there was still uncertainty as to how those licenses would be issued. Intel has been able to resume some shipments, he added.

As for the question of Intel's CPU shortage that began last year, the company expects that it will largely be resolved in the second half of the year, although Swan said some issues with product mix will remain. That issue of product mix had its largest impact on Intel's smaller core processors, Swan said, which hurt sales in the company's PC business for the second quarter and caused the company to lose some market share.

"Our expectation is we will work our way back in the second half of the year to have more supply," he said.

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