Intel Profit Falls With Slow Growth in Key Data Center Unit

(Bloomberg) — Intel, the world’s biggest semiconductor maker, reported slower growth in its server-chip division, creating concern that the company’s most profitable business won’t be able to make up for weakness in the personal computer market. The shares fell.

Key Points

• Data center group revenue was $4 billion in the second quarter, up 5 percent from a year earlier but the third quarter below the company’s target level. It’s also the second quarter that growth in that unit has fallen below 10 percent, putting it well behind progress needed to reach its prediction of a mid-double-digit percentage increase for the unit this year.
• The Client Computing Group, which supplies more than 80 percent of processors used by the personal computer industry, had revenue of $7.3 billion, down 3 percent from a year earlier. That division generated an operating profit of $1.9 billion.
• Second-quarter net income fell 51 percent to $1.3 billion, or 27 cents a share in the quarter ended July 2, from $2.71 billion, or 55 cents, a year earlier. Profit for the quarter was hurt by a $1.4 billion charge after Intel cut 12,000 jobs.
• The shares dropped 2.9 percent to $34.67 in extended trading. The stock had climbed 3.6 percent this year through Wednesday’s close.

See also: Intel: World Will Switch to Scale Data Centers by 2025

The Big Picture

Under CEO Brian Krzanich, Intel is trying to find new uses for its processors as the personal computer market, its main source of revenue, suffers a fifth straight year of shrinking sales. But the results Wednesday show the company’s biggest growth driver, the data center unit, is also slowing.

“While we remain cautious on the PC market, we’re forecasting growth in 2016 built on strength in data center, the Internet of Things and programmable solutions,” Krzanich said in the earnings statement.

On a conference call with analysts, Krzanich said he expects the PC market to decline in the “high-single-digit” range this year, but that should be offset by double-digit growth from other businesses.The server market should stabilize in the second half of this year, Krzanich said. He said Intel has customer signals that server buying will kick in.

The Detail

• Revenue in the second-quarter was $13.5 billion, up 2.6 percent from last year. Analysts had predicted sales of $13.5 billion.
• Third-quarter revenue will be $14.9 billion, plus or minus $500 million. That compares with an average analyst estimate of $14.65 billion.
• Gross margin, or the percentage of sales remaining after deducting the cost of production, will be 62 percent in the third quarter, plus or minus a couple of points. It was 61.8 percent in the second quarter.

Street Takeaways

“It’s a problem that has to be explained,” said Kim Forrest a senior equity analyst at Fort Pitt Capital Group, referring to the slowing growth in the data center division. “Yes, there is some data moving to ‘the cloud’ but they need to show that Intel supplies that area too.”