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Why Intel Is Eyeing Its Data Center to Drive Growth

Data Center Group

By Paige Tanner

As softness in the PC space is likely to continue over a long period, the company has been shifting its focus away from the CCG (client computing group) to the DCG (data center group) and the IoTG (internet of things group).

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The DCG has been Intel’s most profitable segment in fiscal 2014 and 2015. In fiscal 3Q15, the segment’s revenue rose 12% YoY (year-over-year) to $4.1 billion, largely due to strong demand from the cloud and enterprises. The segment’s operating profit rose 9% YoY to $2.1 billion during the quarter.

Guidance

The sluggish macroeconomic environment has affected demand from the enterprise segment. However, the enterprise weakness will be partially offset by strength in the cloud segment. Intel has therefore reduced its revenue guidance for the DCG from the previous ~15% growth to low-double-digit growth in fiscal 4Q15.

Cloud and enterprise market

Intel has a monopoly in the server space, accounting for a 95% share. Public cloud providers like Amazon (AMZN) Web Services and Microsoft (MSFT) Azure use Intel’s customized chips. Ideally, the growth in the cloud should drive DCG growth. But that’s not the case.

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The public cloud is slowly eating up demand for data centers, with more and more companies moving to the cloud. As per Deutsche Bank, GE plans to shut down about 30 of its 34 data centers by 2020 and Capital One about five of its eight data centers. This will leave few enterprise customers in the data center market, giving cloud providers an edge and forcing Intel to lower prices.

Intel’s strategy

However, Intel’s growth in the data center market is beyond the cloud and enterprise and into a broad portfolio of products. The company is expanding in the networking segment through its silicon photonics. It will launch field programmable gate arrays with Altera (ALTR). Gradually, Intel looks to offset enterprise weakness with growth in these segments.