During Intel's (NASDAQ:INTC) Nov. 19 investor meeting, company management provided a lot of insight into the company's fast growing and highly lucrative data center business. To provide some context, this is a business that is expected to bring in more than $16 billion in revenue this year at an operating margin percentage of around 50%.
It's a wonderful business and Intel has made it clear that this will be the company's primary growth engine in the years ahead.
Both Data Center Group ("DCG") general manager Diane Bryant and company CFO Stacy Smith provided a lot of insight into the strategy and the financials of this business, and I'd like to share five of the most important points that I took away from the materials that they presented.
End market mix has gotten much healthier
A point that Smith made during his presentation is that, historically, the company's data center business had been highly dependent on selling processors/products to enterprise server customers. Obviously, the revenue from this segment is substantial, but the issue is that this segment of the market isn't really growing all that much.
Indeed, although Intel saw its enterprise server platform sales grow slightly in 2014, sales actually contracted slightly during 2015, which is why the company couldn't quite deliver on its original growth targets set forth at last year's investor meeting.
However, over the last few years, Intel has seen robust growth in cloud server chip sales (around 40% year over year in 2015) as well as in the aggregate of its high-performance computing, workstation, networking, and storage segments (10% year over year in 2015).
When all is said and done, Intel expects that in 2016, the revenue contributions from each of these three buckets will be about a third of total revenue. This should mean a much healthier end-market mix, making it easier for the company to achieve robust growth in the coming years.
The growth won't come from just CPUs
Although the majority of Intel's data center group sales come from sales of processors, the company has made it clear that it wants to expand its share of wallet in this market by offering a competitive set of complementary products.
Indeed, Intel forecasts a compounded annual revenue growth rate of 15% for its data center group between 2015 and 2019. What's interesting, though, is the company expects revenue from CPUs to grow at a 12% clip annually over that time, meaning that the rest of the growth will come from what the company refers to as "non-CPU" products.
Such products include silicon photonics products, Omni-Path adapters/switches, Ethernet products, and much more.
By offering more platform elements, not only does Intel take in more revenue but it can offer more complete "end-to-end" solutions that competitors will find difficult to match.
What's the forecast look like for 2016?
According to Smith, Intel expects DCG to see revenue growth in the "mid-teens" percentage during 2015, which I take to mean between 15% and 17% revenue growth. Given the size and profitability of this business, it would be quite an impressive feat if the company is able to hit that target.
Smith also said that Intel expects operating profit to grow at a low double-digit percentage clip, which is lower than revenue growth (implying operating margin contraction) This, Smith indicated, is due to the fact that Intel will be seeing an increase in product manufacturing costs as it transitions its server processor lineup from the more mature 22-nanometer manufacturing technology to the newer, but lower-yielding 14-nanometer technology.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends 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.