Intel reported on Tuesday a surprisingly good quarter by many measures, but the company’s shares dropped as much as 6% in after hours trading. Revenue increased 9% from last year to $15.8 billion while adjusted earnings per share jumped 21% to 80 cents.
But Intel remains a company in the midst of a massive transition away from chips powering PCs and towards faster growing areas such as chips for cloud data centers and smart, connected devices in the Internet of Things. The problem with the latest results, from an investor point of view, was that the areas of strength and weakness were all wrong.
The PC unit showed surprising strength. Even though worldwide PC sales have been shrinking, Intel’s revenue of $8.9 billion represented a gain of 5% from a year ago. CEO Brian Krzanich called the unit’s results “stellar” and “remarkable” on a call with analysts.
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Unfortunately, the good times aren’t going to last. Intel (INTC) said it expected an inventory build up among PC manufacturers in the last quarter will reverse and inventories are expected to shrink in the next quarter. PC chips aren’t targeted as a growth area in Krzanich’s transition strategy and took the brunt of cost cuts and layoffs this year.
Meanwhile, revenue for chips in data centers grew 10% to $4.5 billion. That’s the highest ever quarterly level of sales at Intel, in one of its most important new growth areas—but it’s less than Wall Street analysts expected. Data center revenue growth seriously lagged in the second quarter, when it rose only 5%, and was slightly disappointing with a 9% increase in the first quarter.
In past quarters, Intel had said that it still expected to show data center revenue for the entire year increasing at a rate in double digit percentages, but on Tuesday CEO Krzanich conceded that the company would not hit that mark. Instead, data center revenue for the year will end up increasing in the high single digit percentage, he said.
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The problem is that even as big cloud service companies like Amazon (AMZN) and Google (GOOGL) are expanding rapidly, non-tech companies that own and run their own traditional data centers are cutting back faster than expected.
“We saw some weakness in the enterprise and that’s what we’re expecting in Q4,” former CFO Stacy Smith said on the call with analysts. Smith has shifted to oversee manufacturing, sales and operations. Bob Swann, the former CFO of eBay, took over as CFO at Intel this month.
Ultimately, the Internet of Things will fuel demand for cloud services, Smith tells Fortune. A single connected car will produce as much data as 3,000 typical people produce on a year, he says. “What’s driving the cloud is all of these smart and connected devices,” Smith says. “The cloud becomes the heart of what we do at Intel.”
But at least for the third quarter, Intel’s good news was bad news for investors.