Intel’s CEO says that cloud providers like Amazon are back to buying lots of chips, leading to a strong quarter — but that ‘we’re letting our customers down’ in the PC chip business (INTC)

It looks like the spending pause in the data center market that had been dragging Intel down may be ending. And that's good news for the business that Intel expects to propel the chip behemoth to a new era of growth.

Intel shares climbed 3% in late trades after the chip giant reported stronger-than-expected results, powered by solid gains in its data center business. The Santa Clara, California-based semiconductor maker also boosted its quarterly and full-year outlook.

"We feel great about the quarter," Intel CEO Bob Swan told analysts on an earnings call. "The market we see, the trends we see are as big as we've ever seen."

On the other hand, its PC chips division, which was once Intel's core business, posted a 5% dip in sales to $9.7 billion.

Intel has struggled with production issues that led to the company underestimating demand, with the consequence that PC manufacturers have recently found themselves without enough chips to meet demand for their hardware. Swan said those production challenges will likely linger in the fourth quarter, but will hopefully be resolved by next year.

"We're letting our customers down and they're expecting more from us," he said. "Our intention next year is not be a constraint on our customer's growth."

Things are looking good in the data center

The trends are particularly upbeat in the data center market. Revenue for Intel's data center business rose 4% year-over-year to $6.4 billion.

Intel makes processors that power data centers and cloud platforms. Intel and other chipmakers saw strong demand for these products the previous year boosting expectations of continued strong growth.

With a shrinking PC market, Intel has pivoted to focus on chips for the expanding cloud market, where major providers — like Amazon, Microsoft, and Google — are looking to expand capacity by building more and bigger data centers.

But the data center and cloud buildout recently stalled, leading to a sudden slowdown in chip demand.

"Our experience with the cloud providers is they go through big buying cycles and relatively long digestion periods," Intel CEO Bob Swan told analysts.

He said that "digestion period" appeared to be ending in the third period when "we started to see them come back into the market to begin to purchase a bit more."

While the data center soars, the PC business stagnates

Analyst Patrick Moorhead of Moor Insights & Strategy said Intel's data center business growth was the most impressive part of the report.

"I believe the biggest breakthrough was the data center group for growth in the second half of the year, which had been promised and many dismissed," he told Business Insider, citing some skepticism about Intel's projections. Enterprise growth, he added, is "a very good sign."

Still, Intel's shrinking PC business was a notable weakness in the view of analyst Marty Wolf, president of Martinwolf M&A Advisors.

Intel "can't build enough to meet demand," he told Business Insider. "Not a good place to be for a world class manufacturer. Since there really were no surprises in forecasts, it's inexplicable. When they block and tackle better, the shareholders will be rewarded."

By the numbers

Intel reported a third-quarter profit of $5.99 billion, or $1.35 a share, compared to a profit of $6.4 billion, or $1.38 a share for the year-earlier period.

Revenue edged higher to $9.19 billion from $19.16 billion in the year-ago quarter. Adjusted income was $1.42 a share.

Analysts expected a profit of $1.24 a share on revenue of $18.05 billion.

For the fourth quarter, Intel said it expects adjusted profit of $1.24 a share on revenue of $19.2 billion. Analysts were expecting a profit of $1.21 a share on revenue of $18.82 billion.

Intel raised its full-year revenue forecast by $1.5 billion to $71 billion. The chip giant said it now expects adjusted profit of $4.60 for the current year.

Analysts were expecting a profit of $4.39 a share, on revenue of $69.43 billion.

Got a tip about Intel or another tech company? Contact this reporter via email at [email protected], message him on Twitter @benpimentel. You can also contact Business Insider securely via SecureDrop.

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