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The Transformation of Intel Corporation's Data Center Group

By Ashraf Eassa - Updated Aug 2, 2017 at 2:34PM

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Intel is relying on cloud and communications service provider growth to offset a declining enterprise server business.

Microprocessor giant Intel (INTC -0.41%) has been on a multiyear journey to diversify its business away from the declining personal-computer market. The key to this transformation has been the company's aggressive efforts to continue to grow its data-center business.

As Intel's broader transformation relies on its data-center business to grow and continue to become a larger part of its business, the data-center business itself has been undergoing something of a transformation as well.

Intel's Xeon Scalable processors.

Image source: Intel.

The business has traditionally relied heavily on the enterprise server market -- think of these as data centers that companies operate for themselves, on-premises.

However, over the past several years, there has been a substantial shift toward cloud computing. Organizations, particularly smaller ones, have found it easier to essentially eschew building their own infrastructure and instead rely on cloud computing.

Microsoft (MSFT -0.26%), a major cloud service provider and large buyer of Intel data-center technologies in support of its role as one of the top cloud service providers, defines cloud computing as "the delivery of computing services -- servers, storage, databases, networking, software, analytics, and more -- over the internet ."

Intel benefits from the rise of cloud computing, as it is pretty much the processor provider into this market. However, as companies shift toward cloud computing, they shift away from having data-center technologies on-premises.

This situation can be best illustrated in Intel's most recent financial results. Intel reported  that its data-center group (DCG) enjoyed 9% year-over-year revenue growth. The company says its revenue from cloud service providers surged 35% year over year and its revenue from communications service providers grew 17% year over year, but that its "enterprise and government" revenue within DCG dropped 11%.

That cannibalization has helped to keep a lid on Intel's DCG growth, but there appears to be light at the end of the tunnel.

Expanding cloud, shrinking enterprise

During the second quarter of the year, Intel says its revenue from cloud and communications service providers was collectively worth "nearly 60% of total DCG revenue."

Back in 2013, enterprise-related revenue made up the bulk of DCG's total revenue.

Intel management seems resigned to the reality that enterprise server-related revenue will continue to decline from here on out, though the company does appear committed to slowing this decline by as much as possible.

The likely reason management shared the "nearly 60%" figure with respect to cloud and communications service-provider revenue is that the larger a portion of Intel's DCG revenue becomes in the cloud and communications service provider segment, the easier it'll be for Intel's DCG to enjoy overall revenue growth.

The transformation of Intel's DCG isn't over yet -- enterprise-related revenue is still a significant portion of the business and should continue to be for quite some time -- but the company is certainly making progress.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

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