Tuesday, August 8, 2017

Intel sees rapid shift from enterprise to cloud, increased NFV spending

Intel beat financial expectations when it released its Q2 2017 financial results in late July.  The company cited strong growth in its client computing (up 12 percent) and data-centric businesses (up 16%). The good earning report builds on the marketing momentum it established in the quarter with the launch of its Intel Core X-Series family of processors, which are designed for advanced gaming, AR and VR client applications, as well as its Intel Xeon Scalable processors for data centres, artificial intelligence (AI) and other data-intensive workloads. The recent Xeon launch was covered here previously.

Because Intel holds such a dominant and strategic position in the IT ecosystem, its quarterly report is often an excellent measure of the industry’s overall health and an early indicator of significant trends that will impact global network traffic.

The Q2 review

For Q2 2017, Intel reported revenue of $14.8 billion, up 9% year-over-year. After adjusting for the Intel Security Group (ISecG) transaction, which was spun out as an independent company on April 3rd and now known by its original name of McAffee, Intel’s Q2 revenue growth was even better – up 14% from a year ago. Operating income was $3.8 billion, up 190% year-over-year, and non-GAAP operating income was $4.2 billion, up 30%. EPS was $0.58, up 115% year-over-year and non-GAAP EPS was $0.72, up 22%. For Q2, Intel generated approximately $4.7 billion in cash from operations, paid dividends of $1.3 billion, and used $1.3 billion to repurchase 36 million shares of stock.

To top off the good news, Intel raised its full-year revenue outlook by $1.3 billion to $61.3 billion and raised its EPS outlook to $2.66 (GAAP) and $3.00 (non-GAAP), a 15 cent increase over the previous guidance.

Key Business Unit Revenue and Trends
Quarterly Year-Over-Year
Q2 2017
vs. Q2 2016
Client Computing Group
$8.2 billion
up
12%
Data Center Group
$4.4 billion
up
9%
Internet of Things Group
$720 million
up
26%
Non-Volatile Memory Solutions Group
$874 million
up
58%
Programmable Solutions Group
$440 million
down
5%
*Data-centric businesses include DCG, IOTG, NSG, PSG, and all other

Clearly a lot of hot areas and promising technologies at Intel

For the Data Center Group, Intel said its current 9% annual growth rate in Q2 probably can be sustained for the whole year – a fantastic result considering that service provider spending overall, including for mobile infrastructure in developed markets, appears to have stalled. Capex budgets may not be restored to normal levels as a percentage of carrier revenue until the 5G upgrade cycle gets under way.

On its Q2 investor conference call, company execs commented that by 2021 the silicon opportunity for data centres could be worth $65 billion per year and that Intel is currently less than 40% of the total available segment today. Beyond its Xeon processors for cloud servers, Intel is chasing adjacent product categories, including Ethernet, Silicon Photonics and its 3D XPoint memory. Its goal is to rule the full data centre rack, and not just the server motherboard.

Cloud and communications service providers

For Intel's DCG, sales for public cloud zoomed up 35% year over year. On the other hand, enterprise data centre spending declined 11%. The two figures are clearly related, with a rapid shift of workloads to the public cloud underway. One can presume many of these to be new workloads. At the time of deployment, companies are signing up for public cloud capacity instead of buying new servers for their enterprise data centre. Or simply, when servers are ready to be retired, enterprises are moving their workloads to the public cloud rather than buying new servers.

Intel cited communication service providers as another growth vector for DCG. Revenues here rose 17% year over year. For Intel, this is good news as it would seem to indicate that network functions virtualisation (NFV) is finally taking hold. Previously, there have been statements from AT&T and Orange revealing an accelerated schedule to migrate large percentages of their network function workloads onto virtualised infrastructure, i.e. x86 platforms.

Leading deployments with the top-tier communications service providers have been underway for the past year. Intel’s 17% growth rate for CSPs seems to indicate a broader adoption base for NFV. If this growth can be sustained, one should expect other companies in the NFV ecosystem to start showing results as well, such as companies offering virtual network functions (VNFs) such as firewalls and load balancers. The NFV movement has had a very long incubation cycle, and now the real spending by CSPs for Intel gear will be a boost for many players.

Together, the cloud and CSP segments make up nearly 60% of Intel’s total DCG revenue. The other segments include the IoT Group, where Q2 revenues were up 26% to $720 million; the non-volatile memory solutions group (NSG), where sales were up 58% to a record $874 million; and the programmable solutions group (PSG), formerly Altera, where revenue declined 5% to $440 million. Intel completed its $16.7 billion acquisition of Altera in January 2016, so it now has a track record of over one full fiscal year in managing the group’s business. The group specialises in field-programmable gate array (FPGA) technology.

A further note regarding Intel and CSPs

On its Q2 investor conference call, Intel CEO Brian Krzanich said the company is making inroads with its 5G strategy as there are now five ongoing trials underway with global service providers and 15 more in the pipeline. We know from earlier announcement that Intel’s office in Austin, Texas became the first customer site for AT&T’s pilot 5G network in December 2016. The 5G fixed wireless pilot in Austin is delivering and ultra-fast Internet connection and DIRECTTV NOW using Ericsson's 5G RAN and the Intel 5G Mobile Trial Platform.

Mobileye acquisition approaches completion

As Intel makes its transition from a PC-oriented company into a data-centric company it is seeking adjacent opportunities either through internal development or acquisitions. One topic on everyone's mind in Silicon Valley is autonomous driving. In this area, it looked like NVIDIA was moving faster to capture the huge opportunity in next gen transport systems. For instance, the newly unveiled Tesla Model 3 is powered by the NVIDIA DRIVE PX 2 AI computing platform. To counter this, in March Intel announced plans to acquire Mobileye, a developer of machine vision systems for automated driving, in a deal valued at $14.7 billion.  Mobileye, based in Israel, claims to be the leading market position in computer vision for Advanced Driver Assistance Systems (ADAS). Its portfolio includes surround vision, sensor fusion, mapping, and driving policy products. Mobileye's EyeQ chips are already installed in 16 million vehicles as of 2016. Mobileye currently has OEM relationships with GM, VW, Honda, BMW, PSA, Audi, Kia, Nissan, Volvo, Ford, Renault, Chrysler, SAIC and Hyundai. Mobileye reported 2016 revenue of $358 million and gross margin of 76%. For2017, it should bring in more than $1.6 billion in revenue. Intel said its Mobileye acquisition will be completed by the end of the year.

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