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Intel Corporation (INTC)’s Datacenter Problems

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Intel Corporation (NASDAQ:INTC)This earnings season hasn’t been the hottest for the technology sector. Google Inc (NASDAQ:GOOG) missed expectations, Microsoft Corporation (NASDAQ:MSFT) fell flat on its face, and Intel Corporation (NASDAQ:INTC) just barely met expectations (that were already lowered).

Chipzilla’s problems

Okay, I’ll admit it; I haven’t been a huge fan of Intel Corporation (NASDAQ:INTC). The company is too far upstream to be able to easily adjust its operations. It’s not software, it is hardware, and with hardware come a ton of fixed costs. Intel has a really small set of tools to work with.

Intel Corporation (NASDAQ:INTC) continues to struggle, as the company reported revenue that declined 5.11% year-over-year. The decline in year-over-year revenue came from weaknesses across all of its segments. The company reported that consumer PCs were down 7.5% year-over-year, with data centers flat year-over-year, and Intel Corporation (NASDAQ:INTC) architecture group (mobile division) down 15% year-over-year.

The weakness in its high-margin PC and server business was what sank revenue the past quarter. The company doesn’t seem to have a specifically defined growth strategy, which is something I have repeatedly pointed out.

The company’s cost of sales (basically cost of goods sold) was up year-over-year by 8%. Research and development and marketing costs were essentially flat. The loss of revenue, paired with the rising cost of sales, resulted in a 30% year-over-year decline in net income.

The company reported $0.39 in diluted earnings per share for the quarter. Analysts were anticipating the company to report $0.39 for the quarter. So, the company didn’t really miss its previous guidance, but at the same time, the overall direction of the business didn’t improve.

The revenue guidance for the full-year was the real kicker. It went from low single digits to flat. This means that the company projects that the mobility segment will not be enough to offset the losses in its PC and mainframe business. The mainframe business is a huge concern weighing on analysts because it was Intel Corporation (NASDAQ:INTC)’s last pillar of growth, and it has finally crumpled.

IBM — Long live the server

The mainframe business is on the decline. This is because virtualization and storage-as-a-service better utilize hardware. Companies want to outsource IT (Information technology), to third parties like International Business Machines Corp. (NYSE:IBM), Amazon.com, Inc. (NASDAQ:AMZN), Oracle Corporation (NYSE:ORCL), VMware, and Cisco Systems, Inc. (NASDAQ:CSCO).

In an era of cloud virtualization, excess capacities that used to exist no longer exist. Most of the time, when a company individually builds out its own data-center, there was a lot of power left over for other uses.

But with virtualization, excess capacity is reduced. When a company offers to house your data, it houses the data on a server that may serve hundreds if not thousands of clients from the same data center. The better utilization of hardware, or the centralization of it, reduces the demand for individual servers and components.

IBM earnings

International Business Machines Corp. (NYSE:IBM) reported a 3.3% year-over-year decline in revenue for the second quarter. The decline in revenue was primarily driven by declines in the systems and technology segment which declined 11.8% on a year-over-year basis. The decline in the systems and technology segment was offset by the software segment, which was up 4.1% year-over-year.

International Business Machines Corp. (NYSE:IBM)’s total expenses were up 12.2% year-over-year. The increase in expenses paired with decline in revenue resulted in the company generating $3.2 billion in net income (year-over-year decline of 16.1%).

IBM reported earnings per share of $3.91 per share. The company beat the consensus earnings estimate of $3.77 per share for the quarter. The stock is 5.52% above its 52-week low.

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