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Intel Earnings: And Now the Bad News -- IT Buying Has Slowed

For all the attention we pay to the consumer technology market -- PCs, smartphones, tablets -- many tech company live or die based on the spending of corporation IT departments. Intel (INTC) earnings just rose well beyond expectations, but there's a serious dark cloud there: Server purchases, a good proxy for enterprise spending on computers, have started to slow again.

On the positive side, Intel's overall revenue was up 25 percent year-over-year, operating income climbed by 21 percent, and net income jumped by 29 percent. Less positive, gross margin was down 1 percentage point to 62 percent. Intel forecasts that gross margin will drop by another percentage point this quarter and that revenue will be flat or even drop a little.

But take a closer look at the breakdown of results by business unit (click to enlarge):

The Data Center Group sells products "that are incorporated into servers, storage, workstations, and other products that help make up the infrastructure for data center and cloud computing environments." This is hard core IT spending.

In the earnings release, Intel focused on the fact that revenues in that business unit rose 32 percent year-over-year. But look at the difference between 2010 Q4 and 2011 Q1: down $104 million, or 4.8 percent. Maybe a lot of companies were emptying out their calendar 2010 budgets, spending whatever money was available so as not to lose it. But even if that's true, it still clearly means less spending, and end user devices -- PC client microprocessors -- were sharply up. That would include consumers, who don't have the same end-of-year budget close-outs, but they do have seasonal buying during the holidays.

The question is not Intel's potential results for next quarter, but what might be happening to IT spending in general, whether in the corporate data center or in cloud computing facilities. Sudden gloom and doom would be silly, but some caution on the part of industry executives might be prudent.

One other interesting point is the rapid (70.5 percent year-over-year) growth of the Other Intel Architecture Group, which, according to Intel, comprises the following:

  • wireless handset communications chips
  • embedded computing (processors built into non-computer products)
  • netbooks and tablets
  • consumer electronics devices
  • low-power handheld devices
However, this jump could be largely due to the acquisition of the wireless business from Infineon, which closed in January. That would be beefing up a strategic weak point for Intel, but through acquisition rather than organic expansions.


Image: Intel
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