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Cloud Provider Spend on Intel Data Center Chips up by One-Third in Q2

Ian King (Bloomberg) — Intel Corp. has a message for investors who are betting the semiconductor maker’s dominance is waning: Not so fast.

The company’s Data Center Group — which sells server chips, a business where Intel has almost 100 percent market share — posted sales of $4.4 billion in the second quarter, a gain of 9 percent. Revenue in the personal-computer processor division rose 12 percent even as the overall PC market shrank. The company also gave an upbeat forecast for third-quarter and annual revenue, sending the shares up as much as 4.5 percent in extended trading.

Though most of Intel’s sales come from PC chips, the more-lucrative server business has propelled profit and accounted for most of the company’s revenue growth since 2011. Under Chief Executive Officer Brian Krzanich, Intel has been branching out into new markets such as memory chips that could help make up for the PC market’s persistent decline. At the same time, Intel’s newest products for servers and personal computers may be driving a spike in demand.

“You have to take your hat off to Intel in terms of the ability to foster growth in a very flat space,” said Daniel Morgan, a fund manager at Synovus Trust Co., which owns Intel shares. “They are definitely bucking the trend.”

Intel shares rose as high as $36.55 following the announcement, after closing at $34.97 in New York trading. The stock has lagged behind peers this year with a 3.6 percent drop, compared with a 21 percent advance in the Philadelphia Stock Exchange Semiconductor Index.

“The market, both consumer and business, continue to look for higher performance,” Chief Financial Officer Bob Swan said in an interview. “The higher the performance the consumer and business needs, the better for us. We generate higher average selling prices from those units.”

In the data center business, while demand was down from companies and governments, revenue from cloud providers increased 35 percent. Makers of networking equipment are also buying more Intel chips, Swan said. Sales in the company’s memory-chip division jumped 58 percent, and the unit is on course to be profitable this year, he said.

Second-quarter net income climbed to $2.8 billion, or 58 cents a share, from $1.3 billion, or 27 cents, in the same period a year earlier. Sales rose 9 percent to $14.8 billion. Excluding certain items, profit was 72 cents a share. On that basis, analysts had projected 68 cents in profit on revenue of $14.4 billion.

Third-quarter revenue will be about $15.7 billion, the Santa Clara, California-based company said Thursday in a statement. Analysts had projected $15.3 billion, according to the average of estimates compiled by Bloomberg. Annual sales will be as much as $61.3 billion, topping the average prediction of $60.2 billion.

Intel is facing a revived challenge from longtime straggler Advanced Micro Devices Inc. The smaller chipmaker, which for years has tried and failed to make a significant dent in Intel’s dominance in either the PC or data-center markets, predicted a jump in sales of as much as 26 percent in the current quarter as it begins offering new server chips it says can compete with Intel for the first time in nearly a decade.

Earlier this month, market researchers said the PC market lost ground again in the second quarter after showing some growth earlier this year, signaling that computer makers are struggling to retain the interest of consumers. Worldwide shipments totaled 60.5 million in the second quarter, a decline of 3.3 percent from the same period a year ago, according to IDC.

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