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Intel had a strong earnings report on Tuesday, beating Wall Street’s revenue and earnings targets.
The overall beat was all the more impressive considering it came against the backdrop of a shrinking PC market – demonstrating that Intel’s effort to become less reliant on its PC business are paying off.
“Overall, we’re seeing a weak PC client business being offset by strong growth in the data center, memory, and IoT businesses,” Intel’s CFO Stacy Smith said during earnings call. “We’re much less dependent on the PC segment that we’ve historically been.”
Intel’s Client Computing Group, which includes its PC and mobile businesses, saw $8.5 billion in revenue, this quarter, down 7% from a year ago. But the Data Center Group, now its fastest growing segment, reported an all-time high $4.1 billion in sales, up 12% year-over-year, while its Internet of Things group’s revenue also jumped 10% from the same quarter of last year.
Can the PC business bounce back?
“Given a very weak PC market, Intel did well on revenue, gross margin and EPS, balanced out by datacenter and memory,” Patrick Moorhead, principal analyst at Moor Insights and Strategy told us. “Their diversification plan appears to be paying off with their long-standing investments into flash, cloud servers, storage, and networking.”
Given the shrinking PC market, the drop in Intel’s PC business isn’t all that surprising. Last week, IDC said PC sales had dropped 11% last quarter from a year ago period, while Gartner said it declined 7.7%. The PC market is important to Intel because the majority of its sales have historically come from selling chips to personal computers. Now, Intel is finding growth in other areas such the data center industry and the IoT space, in which helps connect devices through the web.
“It’s impressive that Intel’s been able to grow the way they’ve been able to grow in those areas, in an environment that’s still very uncertain, especially in the macro environment,” IDC’s Mario Morales told us.
The PC market is hoping the release of Microsoft’s new Windows 10 operating system, combined with Intel’s latest Skylake chip sets, will revive its overall sales. Although the PC market hasn’t seen much impact yet from the two products release, Intel CEO Brian Krzanich pointed out during the earnings call that it’s still early.
“You should look at the ability to upgrade to Windows 10 today, actually on-shelf upgraded systems aren’t available until later this month,” he said. “Some of these transitions are going to take some time, so I’m very cautious to say how fast and when.”
“So I do see this as our a great opportunity, and that we should see some tailwinds pushing us in the PC market, but it’s going to be over time. It’s not going to be next quarter and it jumps,” he added.
But despite the earnings beat, investors seem less bullish on the company after Intel lowered guidance on its data center revenue growth for this quarter. As of 5PM PST, Intel shares are down over 3% in afterhours.