For the past several years Intel (INTC, Financial) has needed personal computers, and personal computers needed Intel inside.
The world doesn't look like it needs personal computers anymore. With Intel being shut out of the smartphone chips market, the company was banking on its data center and Internet of Things (IoT) business to drive its future revenues. But how has it done in the first half of this year? Let's take a closer look.
Although the percentage contribution from its client computing group, which holds the processor business for netbooks and desktops, has come down steadily in recent years, it still accounts for more than half of the company's revenue.
With PC sales declining steadily over the years there is zero chance for the PC market to rise to its old levels. It’s clear that Intel’s future performance is entirely dependent upon its data center and IoT business.
What’s in the mix?
In 2015, Client Computing Group sales were $30.654 billion, down 8%, Data Center Group sales were $14.882 billion, up 11%, Internet of Things Group sales were $1.976 billion, up 9%, and Software and Services segment sales were $2.167 billion, down 2%. Essentially, 62% of Intel’s revenue stream – its CCG and SSG – is declining, and the best way forward is to get to a place where Data Center and IoT growth either match or exceed the decline in CCG.
Even better would be if they were able to hold ground on CCG so the other two growth drivers have time to adequately grow and support Intel, and it looks like this is exactly what Intel managed to do over the past six months.
In the first half of this year, the biggest surprise was CCG holding its ground. Thanks to a partial recovery of PC sales worldwide, Intel was able to arrest the revenue slide in the segment and escape with a half a percentage point decline. Unfortunately, DCG, which posted double-digit growth last year, slowed down a bit while in IoT things have somewhat accelerated.
The IoT industry is still very much in its early stages, and explosive growth may not be in the cards just yet. It might actually take several more years for Intel to derive meaningful revenue contribution from this segment.
Where is DCG growth coming from?
Intel’s Data Center Group offers products that are needed to build IT infrastructure, such as servers, network and storage platforms. With the cloud industry growing at a steady pace the potential growth for Intel in this market is huge; and as such, this will be the most significant opportunity for Intel to drive its future growth.
That’s why it's a bit disappointing to see single-digit growth in this segment. However, with all the cloud players reaching into their pockets to expand their datacenter presence around the world, it’s only a matter of time before that growth spills over to Intel’s business.
Though Intel’s performance is encouraging for now, it’s far too early to say that PC sales have bottomed out. With that being the case, datacenter growth is the only way for Intel to keep moving its revenues to higher regions – or at the very least offset its decline in the client computing business. During the second quarter, Intel’s data center business revenues were $4.03 billion while the market was expecting $4.16 billion. If there is one number I will keep an eye on for the next two quarters it will be this. Anything less than double digit growth here will have a massive negative impact on their future.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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