By Don Clark 

For decades, Intel Corp. has been a bellwether for computing trends in homes and offices. The chip giant's latest pronouncements will be studied for clues about the computing phenomenon known as the cloud.

The Silicon Valley company, which is scheduled to report financial results on Tuesday, is banking on stronger hardware spending by big companies that build massive data centers to run their own businesses and offer internet-based computing services to others. Such cloud infrastructure services -- which include Amazon.com Inc.'s Amazon Web Services, Microsoft Corp.'s Azure and Google Inc.'s Google Cloud Platform -- are investing heavily in server systems and other hardware at a time when many other companies have stopped expanding their computing capacity.

Intel, though best known for PC processors, commands a greater portion of the market for the more profitable chips used in servers. The company recently upgraded its forecast for third-quarter results because of a slight improvement in the shrinking PC business, but data centers packed with servers are at the heart of its current growth strategy.

"They've been doing everything they can to shift the narrative," said Stacy Rasgon, an analyst at Sanford C. Bernstein.

That narrative, in the short term, is closely linked to server purchases by companies that offer cloud services. Market researchers like International Data Corp. have predicted an upswing driven by such customers in the second half of this year.

Intel's longer-term plans are more nuanced. The company is increasingly placing microprocessors in other kinds of data-center gear -- including networking and storage devices -- while angling to benefit as new kinds of devices get connected to the internet.

Many of those gadgets won't contain Intel chips, but they are expected to generate floods of data that will energize demand for servers, storage and networking. Intel executives envision a new breed of Intel-powered "gateway" computers in locations like offices and factories that will sift through data from gadgets and pass along only essential bits and bytes. Interactions among those systems, in this scenario, would be coordinated by data-center gear that also includes Intel chips.

"The network will go through a fundamental transformation," said Venkata Renduchintala, an Intel president and recent recruit who oversees many product categories, during an investor presentation last month. "You'll see the data center continuing to play a role of much greater orchestration of the overall network."

But there are several countervailing forces. For one thing, many companies that traditionally bought their own servers -- the largest segment of that market -- have shifted at least some their computing chores to cloud infrastructure providers like Amazon Web Services, or they are considering it. The decline in their spending could outweigh purchases by the cloud companies, analysts say.

"Enterprises are stopping buying, assessing whether they should be doing more on-premise development," said Roger Kay, an analyst at Endpoint Technologies Associates.

Competition, not much of a factor in server chips recently, could pose future obstacles. Intel's longtime rival Advanced Micro Devices Inc., which reports financial results Thursday, is renewing efforts in the field after selling less than 1% of the widely used x86 server chips popularized by Intel.

Qualcomm Inc. next year should deliver new data-center chips based on the ARM Technology PLC technology used in mobile phones. Such chips, analysts say, might not quickly take hold in servers but could grab a foothold in the networking and storage gear that Intel is targeting.

For Intel's latest quarter, though, investors are likely to be fixated on what the company says about growth. Total revenue for its data-center group in the second quarter grew 5%, while the company has vowed to grow in double-digit percentages this year. Hitting that forecast will require more spending on cloud data centers in the third quarter, Bernstein's Mr. Rasgon said.

At least two other companies may provide relevant signals this week. International Business Machines Corp., which operates cloud services along with other technology businesses, reports financial results Monday. Hewlett Packard Enterprise Co., which sells Intel-powered servers for such applications, is kicking off an analyst meeting Tuesday afternoon -- very close to the time Intel reports third-quarter results.

Write to Don Clark at don.clark@wsj.com

 

(END) Dow Jones Newswires

October 15, 2016 09:04 ET (13:04 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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