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Intel Corporation Preps Next-Gen Data Center Chips for "Mid-Summer" Launch

By Ashraf Eassa - Apr 28, 2017 at 12:00PM

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Intel's banking on new chips to fuel continued growth in what is arguably its most important business segment.

In its most recent quarter, chip giant Intel ( INTC -1.22% ) reported that its Data Center Group (DCG) -- the core business unit that the company is betting on for long-term growth -- delivered just 6% year-over-year revenue growth.

The company had previously told investors to expect "high-single digit" revenue growth in DCG for the full year, so naturally coming in below that for the quarter (6% would qualify as "mid-single digit") isn't exactly going to inspire confidence among investors.

A wafer of Intel server processors.

Image source: Intel.

Nevertheless, Intel CEO Brian Krzanich said that the company is "absolutely committing" to hitting its high-single digit revenue growth target for DCG this year (although Intel clearly overestimated DCG's growth prospects last year, significantly missing its initial growth target).

Now, it's worth mentioning that Intel's relatively weak DCG growth in its most recent quarter was, per Krzanich, since the first quarter of this year was a 13-week quarter whereas the year-ago quarter had 14-weeks.

"That's a couple of percent that you're competing against in a year over year basis," Krzanich said.

That said, critical to Intel achieving its desired growth will be the ramp-up of its upcoming Skylake Xeon processors, which promise to deliver substantial enhancements relative to its current Broadwell-architecture products.

New products can often help stimulate demand as well as potentially serve to bolster average selling prices -- both clearly key factors of revenue growth.

Let's take a closer look at what Intel had to say about these chips.

Skylake server coming in "mid-summer"

On the company's earnings call, Krzanich said that the company is "on track for mid-summer launch of [Intel's] next generation Skylake microprocessor," claiming that the chips offer "significant performance gains across a wide range of workloads."

Krzanich continued, explaining that these new Skylake-based server chips will include a technology called AVX-512 that promises to "deliver a 2X improvement in floating-point operations per clock over the current generation."

A silicon die shot of Intel's Haswell-EP server processor.

Image source: Intel.

The executive then went on to say that this performance uplift "will have an especially high impact on [high performance computing] and artificial intelligence workloads."

In terms of fiscal impact, Krzanich said that investors should expect the volume ramp to happen in the second half of 2017 (which clearly makes sense if the product achieves "general availability" in the middle of summer, corresponding roughly to July).

Let's talk margins

On the call, analyst Stacy Rasgon noted that the company's operating margin percentage in DCG was just 35%.

He then asked management to give its view on the DCG margin trajectory over the course of 2017 "as the Skylake parts ramp." Rasgon also asked management if it believes that DCG will "be within the Data Center margin targets that [management] provided at the analyst day."

Intel CFO Robert Swan went on to say that the company's revenue growth expectation for the year continues to be "high single digit" and that it expects to be "at the lower end of that range of the 40% to 45%" (he's referring to the company's stated target DCG operating margin percentage range).

Swan also indicated that he expects DCG average selling prices to "improve as we go throughout the year," which suggests that the Skylake Server processor ramp should help drive improved average selling prices. The executive also said that he expects product manufacturing costs to improve as well, presumably as the company's 14-nanometer manufacturing yields continue to improve.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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