Intel Corporation's Huge Bet on the Data Center

Microprocessor giant Intel's (NASDAQ: INTC) doubling down on its highly lucrative data-center business has resulted in the company, per estimates from Bernstein Research, spending "at least an order of magnitude more on [its data center group, or DCG] than any competitors have available."

That high-level investment certainly wasn't always that high. In fact, as you'll soon see, it went from "big" to "really big" over the course of the last several years.

In this article, I'd like to go over the trajectory of Intel's spending increases in this segment.

Intel's 10-core Ivy Town server chip. Image source: Intel.

2011 marked the beginning

In 2011, Intel reported that revenue from DCG grew by 17% compared to the prior year. Operating profit, on the other hand, only increased by $712 million, or about 16.2%. Intel attributed that operating profit growth to "significantly higher revenue," but noted that this was "partially offset by higher operating expenses compared to 2010."

In other words, operating expenses slightly outpaced revenue.

Acceleration in 2012

After spending slightly outpaced revenue growth in 2011, Intel really put the pedal to the metal in 2012. That year, Intel's DCG revenue saw relatively anemic growth at just 6%.

However, operating expenses far outran revenue that year. The company reported that DCG's operating income came down by $27 million in 2012 relative to 2011. Intel said that the additional $360 million in gross profit that it saw because of the revenue growth was "more than offset by $387 million of higher operating expenses."

Another huge jump in 2014

In 2014, Intel's data-center group had a phenomenal year, achieving revenue growth of 18% from 2013, which itself was up just 7% from 2012 levels. The company said that operating income in DCG popped 31%, thanks to "$2.4 billion of higher gross margin partially offset by $689 million of higher operating expenses."

The big success that DCG enjoyed that year allowed it to really crank up those investments while at the same time delivering excellent operating profit growth.

To put that $689 million increase into context, Cavium (NASDAQ: CAVM)-- one of the companies trying to vie for a piece of Intel's data-center pie -- incurred total operating expenses of $282.7 million in 2015.

An even bigger jump in 2015

Even after growing its DCG operating expenses by $689 million in 2014, Intel wasn't quite done turning up the heat in that segment. In 2015, Intel reported a $725 million increase in operating expenses, which the company said was "driven by higher shared product development costs."

On track for investment growth in 2016, too

Intel hasn't yet reported its financial results for 2016, but based on the first three quarters of the year, it looks as though the company is looking at another year of significant operating expense growth related to DCG.

During the first quarter of 2016, Intel reported that operating expenses grew by $125 million year over year. In the second quarter, Intel didn't highlight a year-over-year change in operating expenses as a driver of its operating profit in that segment. However, in the third quarter, Intel reported a full $285 million year-over-year boost in DCG operating expenses.

I wouldn't be surprised to see another boost in the fourth quarter of 2016, as well.

Intel clearly isn't done growing its already substantial investments in DCG. Intel's new CFO, Robert Swan, is likely to go over the company's investment plans in that segment for 2017 at the company's investor meeting in February.

My bet is that Intel is planning for yet another increase in 2017.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends 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.