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Is Intel Cloud Data Center Slowdown Cause for Concern?

Brian Krzanich

Brian Krzanich

Did Intel just signal a caution flag for the cloud data center market? Perhaps yes. When the microprocessor giant delivered Q2 2016 results today, revenue figures for Intel’s data center business disappointed investors. Ironically, the Intel Security business — which could be up for sale — had a stronger showing.

Indeed, Intel’s Data Center Group revenue was $4.0 billion, up only 1 percent sequentially and 5 percent year-over-year. That figure lagged the previous quarter’s 9 percent increase and remained below Intel’s annual target of low double-digit growth, Reuters noted.

Still, data center-related sales to cloud services providers grew 9 percent and comm service providers grew 10 percent — though enterprise was down 1 percent.

Overall, Intel CEO Brian Krzanich tried to downplay the slowing pace of data center business growth. “These guys don’t build out their data centers in a linear fashion,” he said during an earnings call earlier today. “They grow. They build out a big chunk of over capacity. Then they don’t build for a while. These trends in data tell me: No, it’s not slowing down over the long term. What you’re really going to see is just the buying patterns and the build outs of various structures that will go up.”

Data Center Demand: Learning from Microsoft

Amy Hood

Amy Hood

Krzanich could have a point. Microsoft, for one, apparently added lots of capacity for the Azure cloud in recent quarters — hurting the company’s gross profit margins on cloud services. CFO Amy Hood has stated multiple times that those margins could be unpredictable and may even fall a bit more before trending upward over the long haul.

Demand — rather than competition — seems to be Intel’s top concern in the data center market for the moment. Rivals like AMD haven’t exactly celebrated big market share gains in recent years. And ARM Holdings processors have yet to truly take hold in data centers — though they’re widely popular on mobile devices and could carve out wins in the emerging IoT market. (Hence, SoftBank’s surprise $32 billion bid for ARM Holdings earlier this week.)

Intel Security: McAfee Performance

Meanwhile, the Intel Security (i.e., McAfee) business generated Q2 2016 revenue of $537 million, flat sequentially but up 10 percent year-over-year.

Still, Intel may decide to sell the security business since it may not be core to the company’s data center, mobile and IoT focus areas. At least two private equity firms apparently are mulling a potential bid for the security business, multiple reports have suggested.

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