Perhaps the most impressive part of the Intel story is the company's data center group. The business is large, generates very high operating margins (over 50% last quarter), and is levered to many major secular growth trends, which is why Intel forecasts a 15% compounded annual revenue growth rate for this division through 2018.
During the second quarter, though, Intel saw year-over-year growth in this segment of 10%, below the company's full-year guidance of "at least 15%" and significantly below the 19% growth that the company saw during the first quarter.
Is this something that should worry investors? I don't believe so; here's why.
Understanding the underlying business trendsAt Intel's investor meeting last year, the company broke down the business into four major categories: enterprise, technical computing, cloud, and telecommunications. Enterprise, which is the slowest growing of these subsegments, makes up about half of the company's data center business with the three other, fast-growing subsegments making up the other half.
On the call, CEO Krzanich said the enterprise business performed worse than expected, but that other segments (cloud, networking, and storage) were stronger than expected, offsetting that enterprise weakness.
Krzanich also indicated the macroeconomic factors that appear to be leading the enterprise business to perform worse than expected are also leading to a shift toward cloud computing.
Intel is maintaining its growth expectations for the yearAccording to Krzanich, Intel still expects revenue growth for its data center business to come in at "more than 15% year-over-year." Krzanich also said that the company isn't banking on a "large recovery" of its enterprise business in the second half of the year.
In other words, Intel expects the trend of weaker-than-expected enterprise/better-than-expected nonenterprise growth to remain intact during the second half of 2015.
This business is a "lumpy" businessIntel executives have made it clear that the data center business is a very "lumpy" one. In other words, sometimes the company will see quarters where the growth is well above its target growth rate for the year (which we saw last quarter) and others where the growth is significantly below.
Krzanich actually explained this back on the company's first quarter earnings call:
Everything looks on-track with this businessIt would seem that everything is on-track for Intel to deliver on its 15 percent or better revenue growth in its data center group this year. Despite the difficulty the company is seeing in its enterprise business (which has hurt the company's data center growth in prior years), its other subsegments are now large enough and are growing quickly enough that they can pick up the slack.
As an investor, I hope the company can continue to deliver this kind of solid growth in future years, particularly as each year of 15% or better growth in the data center further offsets the weakness the company is seeing in the PC market.
The article Digging Into Intels Data Center Results originally appeared on Fool.com.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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