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How Is Intel’s Data Center Business Performing?

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Jul. 20 2017, Updated 9:06 a.m. ET

Data center revenue

Intel’s (INTC) move to acquire Mobileye (MBLY) could create an adjacent data center opportunity in the long term. In the meantime, the company’s data center growth has slowed from the double digits to the single digits.

In 1Q17, Intel’s DCG (Data Center Group) segment’s revenue rose 6% YoY (year-over-year) to $4.2 billion, even though 1Q16 had an extra week, which resulted in more days of revenue. Strong double-digit rises in Intel’s Cloud and Communications Service Provider segments were slightly offset by a 3% fall in its Enterprise segment.

On a sequential basis, the DCG segment’s revenue fell 9.4% in 1Q17, as the first quarter is seasonally weak. Its revenue gradually grows with every quarter.

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The DCG segment’s revenue is expected to rise 1.6% sequentially to ~$4.3 billion in 2Q17. It’s then expected to see its growth pick up in 2H17 as Intel launches its Skylake server processor, which should increase the segment’s ASP (average selling price). The company expects the DCG segment’s 2017 revenue to rise in the high single digits.

Skylake should deliver a twofold increase in floating-point operations per clock over its predecessor. It should also be able to better handle high-performance computing and artificial intelligence workloads. Advanced Micro Devices (AMD) has launched the EPYC server processor, which will compete with Skylake.

Data center operating profit

While its growth slowed, the DCG segment’s operating margin contracted from 44% in 1Q16 to 35% in 1Q17. Of this nine-percentage-point contraction, seven points were the result of the transition to a 14 nm (nanometer) node and the ramp-up of adjacency products. This development cost is expected to fall in 2H17.

The DCG segment’s operating margin is expected to be near 35% in 2Q17 and to expand slightly in 2H17 as its development costs fall and its ASP rises. In the long term, Intel expects to improve its DCG margin in the range of 40%–45%.

However, Intel has revised its DCG revenue growth forecast from the double digits to the high single digits for 2017. Next, we’ll see why the company has revised its DCG segment’s growth forecast downward.

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