Perhaps the most impressive part of the Intel (NASDAQ:INTC) story is the company's data center group. The business is large, generates very high operating margins (over 50% last quarter), and is levered to many major secular growth trends, which is why Intel forecasts a 15% compounded annual revenue growth rate for this division through 2018.
During the second quarter, though, Intel saw year-over-year growth in this segment of 10%, below the company's full-year guidance of "at least 15%" and significantly below the 19% growth that the company saw during the first quarter.
Is this something that should worry investors? I don't believe so; here's why.
Understanding the underlying business trends
At Intel's investor meeting last year, the company broke down the business into four major categories: enterprise, technical computing, cloud, and telecommunications. Enterprise, which is the slowest growing of these subsegments, makes up about half of the company's data center business with the three other, fast-growing subsegments making up the other half.
On the call, CEO Krzanich said the enterprise business performed worse than expected, but that other segments (cloud, networking, and storage) were stronger than expected, offsetting that enterprise weakness.
Krzanich also indicated the macroeconomic factors that appear to be leading the enterprise business to perform worse than expected are also leading to a shift toward cloud computing.
Intel is maintaining its growth expectations for the year
According to Krzanich, Intel still expects revenue growth for its data center business to come in at "more than 15% year-over-year." Krzanich also said that the company isn't banking on a "large recovery" of its enterprise business in the second half of the year.
In other words, Intel expects the trend of weaker-than-expected enterprise/better-than-expected nonenterprise growth to remain intact during the second half of 2015.
This business is a "lumpy" business
Intel executives have made it clear that the data center business is a very "lumpy" one. In other words, sometimes the company will see quarters where the growth is well above its target growth rate for the year (which we saw last quarter) and others where the growth is significantly below.
Krzanich actually explained this back on the company's first quarter earnings call:
We've always said in times when the growth is high or times when the growth is a little bit less that this tends to be lumpy. There are large cloud providers that come in with big [?] in their purchasing. So don't be surprised if there's a very high quarter and a not-as-high [quarter].
What we've said, though, is that over time we believe we can continue to grow this business at a mid double-digit, mid-teens kind of growth rate. So 14%, 15%, 16%, somewhere in there, growth rate over the rest -- several year period moving forward.
Everything looks on-track with this business
It would seem that everything is on-track for Intel to deliver on its 15 percent or better revenue growth in its data center group this year. Despite the difficulty the company is seeing in its enterprise business (which has hurt the company's data center growth in prior years), its other subsegments are now large enough and are growing quickly enough that they can pick up the slack.
As an investor, I hope the company can continue to deliver this kind of solid growth in future years, particularly as each year of 15% or better growth in the data center further offsets the weakness the company is seeing in the PC market.