Despite last week's news that Intel (NASDAQ:INTC) was raising its Q2 and annual guidance primarily because of a surprisingly sound business PC market, make no mistake: Intel is still in the midst of a critical transition. The PC market isn't quite dead, as many suggested it would be, but a slowing decline isn't exactly a ringing endorsement of Intel's future, either.
When Brian Krzanich was chosen as the successor to outgoing CEO Paul Otellini a little over a year ago, he made it clear that Intel needs to adapt to changing technologies, including mobile and cloud computing. As for mobile, about the only good news for Intel so far is that the business PC market was better than expected. Exactly. But there's been one, consistent bright spot -- data centers -- and you can bet Intel isn't going to give up its dominant position to low-energy chip competitors like ARM Holdings (NASDAQ:ARMH) without a fight.
Bring it on
Much was made in the IT community of an announcement from open-source Xen Project that it had succeeded in upgrading its software to run on low-power server chips based on a design from ARM Holdings. So, what's the big deal? The software upgrade from the Linux Foundation engineers is compatible with ARM's 64-bit architecture.
The compatibility with ARM 64-bit technologies means large, data-driven companies will soon be able to manage their data centers using servers equipped with ARM chips. Why would an IT guru be interested in ARM over industry-leading Intel? According to Xen open-source aficionados, ARM-based servers are extremely power efficient -- a huge consideration for data centers.
Low-power consumption and a willingness to readily customize chips are compelling arguments for ARM Holdings. But, Intel isn't sitting idly by as ARM, and a bevy of other server chip providers, try to move in on what has always been Intel's territory.
Intel isn't new to customizing chips for large data center customers. Big hitters like Facebook require customized chips for their fleet of servers to address their particular data needs, and there are others. Intel said it will develop and manufacture over 30 customized data center chips this year.
Simply put, Intel has taken its field programmable gate arrays (FPGAs) -- IT-speak for the part of a circuit that is customized to suit specific customer needs -- and combined it with its industry-leading Xeon E5, in the same socket. Generally, the two components are attached, but separate. Conjoining the two maintains the ease of customization that's vital to data centers and speeds up processing time dramatically -- in one fell-swoop.
While there are chips that combine an ARM core with a FPGA, Intel has historically been less responsive to customizing its data center chips. But all of that has changed, and now Intel has yet another arrow in its quiver to fend off ARM and others in the all-important data center market.
With its new, combined FPGA and chip offering, Intel is fighting quantity with quality. And it's a fight Intel must win, because data centers have been a star performer for Intel, even as other areas of the business falter. Last quarter, Intel's PC group was down slightly year over year, mobile was down 61% compared to 2013's Q1, and software and services also took a hit. But data center results bucked the trend, jumping 11% compared to last year, accounting for nearly 25% of Intel's total revenues.
Final Foolish thoughts
As noted in a recent article, the nearly 7% jump in share price after Intel announced its improved guidance for the quarter and balance of 2014 was great for long-suffering shareholders. But let's face it: If one or two years from now, Intel investors are still bidding up its share price based on results in the PC market, there's a problem.
Mobile, cloud, and continued growth and dominance in data centers should be the focus of Intel-related discussions. It's hard to imagine Intel not being successful in its transition to mobile and cloud computing, but it will take some time. Hopefully, recent rumors of a Samsung mobile device with Intel inside comes to fruition, but even that wouldn't be a panacea. The road to mobile dominance is a long one, which is why Intel's continued strength in data centers is so important: It buys time for Intel to kick its mobile chip efforts into high gear.
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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Intel. The Motley Fool owns shares of Facebook and 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.