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With PC sales slumping, Intel’s betting on the cloud

Brian Krzanich, chief executive officer of Intel Corp., speaks during a keynote session at the Mobile World Congress in Barcelona, Spain, on Wednesday, March 4, 2015. The event, which generates several hundred million euros in revenue for the city of Barcelona each year, also means the world for a week turns its attention back to Europe for the latest in technology, despite a lagging ecosystem. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Brian KrzanichBrian Krzanich, chief executive officer of Intel Corp., speaks during a keynote session at the Mobile World Congress in Barcelona, Spain, on Wednesday, March 4, 2015. The event, which generates several hundred million euros in revenue for the city of Barcelona each year, also means the world for a week turns its attention back to Europe for the latest in technology, despite a lagging ecosystem. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Brian Krzanich
Brian Krzanich, chief executive officer of Intel Photograph by Simon Dawson — Bloomberg via Getty Images

Intel executives don’t foresee the slumping personal computer market recovering anytime soon or a rebound in selling the chips that power them. But they are seeing early promise in selling semiconductors for data center gear, which they hope will eventually make up for the decline in its core computer chip business.

This reality was readily apparent in Intel’s third quarter earnings report on Tuesday. Sales were flat at $14.5 billion, largely because of consumer aversion to buying new desktops and laptops. Revenue in the division that makes computer chips fell 7% to $8.5 billion compared with $9.2 billion in the same quarter a year earlier.

But Intel’s data center business continues to grow. The unit responsible logged $4.1 billion in sales, a 12% increase from the $3.7 billion it brought in the year-ago quarter.

Intel executives explained the gain as coming from the rise of cloud computing, whereby companies like Amazon (AMZN) provide data center computing to corporate customers. Intel hopes that this growing business will eventually offset any declines elsewhere in its business.

As a sign of its optimism about data center chips, Intel acquired chipmaker Altera for $16.7 billion in June. Altera beefs up Intel’s muscle in making advanced chips for the data centers and the cloud.

“The cloud has been helping us grow at a rate faster than we expected,“ said Intel (INTL) CEO Brian Krzanich.

But don’t expect smooth sailing for the data center group in the next quarter.

Krzanich said that “cloud enterprises tend to not do large purchases” in the fourth quarter because of the holidays. The fourth quarter is their selling season and “they don’t want to mess up their systems” by updating their data center gear while staff is on vacation or because of the busy season for retail customers.

In another positive sign, a separate unit that focuses on the Internet of things, the emerging market of chips for Internet connected toasters, thermostats, and assembly lines, took in $581 million in the third quarter. That marks a 10% year-over-year increase from the $530 million from last year.

Analysts listening in to an earnings call seemed frustrated about the PC market and it years-long decline. One analyst asked Krzanich if we’ve finally reached a point when the PC market has bottomed out.

Krzanich tried to reassure investors by saying that a new Windows 10 operating system about to go on sale and a new chip design will help with sales. But he hedged about whether the PC market will recover anytime soon.

“I do think there is a good point for optimism,” Krzanich said. “That said, some of these transitions are going to take some time.”

Shares of Intel were down 2.8% in after hours trading. Intel did beat analysts’ expectations by reporting earnings of 64 cents per share.

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