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Intel’s Data Center Business Returns to Double-Digit Growth

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Mar. 16 2018, Updated 7:32 a.m. ET

Intel’s data center business

Intel (INTC) is looking to be at the core of the 5G revolution, providing end-to-end 5G solutions from the data center to edge computing. The data center is the starting point of AI,[1.artificial intelligence] and 5G and Intel dominate the server processor market with over 99% market share.

The increasing adoption of AI saw data centers upgrade to premium products that support deep learning, resulting in NVIDIA (NVDA) and Intel reporting strong data center earnings in 2017. Intel’s DCG (Data Center Group) has reported its highest profit since 2011, which the company has used to fund the expansion of its data-centric business.

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DCG earnings

Intel’s DCG revenue rose 11% YoY (year-over-year) to $19.1 billion in 2017, with its improved product mix driving ASPs (average selling prices) up 4% YoY and units up 5% YoY. The group’s operating margin expanded from 43.6% in 2016 to 44% in 2017, as 2016 profits were hit by one-time charges. The earnings were ahead of the company’s expectations.

Its fiscal 2017 growth was driven by better-than-expected earnings in 4Q17. During the quarter, DCG revenue rose 20% YoY to $5.6 billion, marking the first time DCG’s quarterly revenue crossed $5 billion. Its operating income rose 59% YoY to $3 billion, resulting in an operating margin of 54%. This growth was driven by 10% YoY growth in volumes and 8% YoY growth in ASPs.

DCG customer segments

DCG volumes rose thanks to all four of its customer segments witnessing strong demand: year-over-year, cloud revenue rose 35%, communications service revenue rose 16%, enterprise revenue rose 11%, and adjacency revenue rose 35%. DCG ASPs rose as all customer segments accelerated their deployment of Intel’s high-performance Xeon Scalable processors.

Demand from communication service providers has risen as they virtualize their networks to prepare for 5G. Demand from enterprise was seasonal and is unlikely to last in 1Q18. Intel is increasing its DCG exposure to cloud customers.

Intel joins Huawei’s industry cooperation

Intel has joined Huawei’s cloud VR[2.virtual reality] industry cooperation, where industry leaders collaborate to develop end-to-end cloud VR solutions and explore profitable ways to commercialize this technology. Partners are to contribute their respective technology to develop cloud VR solutions, with Huawei contributing advanced network solutions, Microsoft (MSFT) contributing its mixed reality platform, CyberCloud contributing VR cloud rendering solutions, and Intel contributing Xeon processors, to enable systems to perform immersive media transcoding, computing, and rendering. Intel has also launched its AI platforms and is making efforts to increase their adoption, which we’ll discuss in the next part.

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