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Enterprise servers go soft at Intel in Q3

Cloud builders humming along, four-socketeers slowing

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Intel had a less than stellar performance in the third quarter, as El Reg reported yesterday, and the problem was enterprise servers as much as it was PCs.

In the quarter ended in September, overall sales were down 5.5 per cent to $13.46bn, and thanks to a spike in research and development spending, net income was down 14.3 per cent to $2.97bn.

Within the Data Center and Connected Systems Group, which makes processors and chipsets for servers, storage, and network switches, sales were actually up but not up as much as Intel had hoped.

Within the data center part of Intel's chip business, sales were $2.65bn, up 5.7 per cent year-on-year, but operating income fell seven-tenths of a point to $1.21bn. All things considered, this was not so bad. But, Intel is in the middle of a Xeon E5 chip ramp and sales should be accelerating as that ramp takes off, but instead were down 5 per cent compared to the second quarter.

Chip volumes aimed at this data center gear were up 4 per cent from a year ago, but only up 1 per cent from the second quarter, and average selling prices (ASPs) for chips were up 1 per cent from a year ago, when everyone was expecting the Xeon E5 launch to be just around the corner (it wasn't, and was pushed out to March and May of this year). More tellingly, ASPs for chips aimed at servers, storage, and switches fell by 7 per cent from the second quarter.

In a conference call with Wall Street analysts going over the numbers yesterday after the markets closed, Intel CEO Paul Otellini said that corporate server spending was "softening over the course of the quarter" but added quickly that spending among hyperscale cloud operators was up 50 per cent and among storage device makers was up 27 per cent, setting a new record there.

But still, Otellini conceded that the caution among enterprises that has affected PC spending has now "spilled over" into server spending. "I think we will see how that sorts out over the next quarter or so as CEOs and CIOs make their next round of decisions," Otellini said.

Stacy Smith, Intel's CFO, piped up that spending among large enterprises for servers weakened as the quarter progressed, which impacted sales of Xeon chips to Intel's OEM customers who make x86 servers.

Otellini said that sales to companies building high-end supercomputing clusters were still strong, and that the mix of chips going into storage, networking, and hyperscale data centers "was actually quite good" and that he saw "the current mix being a bit of an anomaly" because of softness in enterprise server purchases.

When pressed, Smith said that the softness in particular was for four-way systems among enterprises and that cloud customers tend to buy two-socket boxes. So it looks like enterprises might have been hoping for a "Sandy Bridge-EX" Xeon E7 update, which Intel canceled so it could jump straight to the "Ivy Bridge-EX" next year. It would also seem to indicate that uptake for the four-socket Xeon E5-4600 is not sufficient to fill in the gap for a Sandy Bridge E7 that would have been expected at around Intel Developer Forum in September.

Moreover, Intel has not yet launched the eight-core "Poulson" Itanium 9500 processors, which would have helped pump up sales had they been out by now. The word on the street is that we will see the Poulson chips before the end of the year, but Intel has made no commitments to that effect publicly.

As usual of late, talk turned to the gathering army of ARM server chip suppliers, who all want to take a bite out of Intel Xeon and Atom server chip business, and once again Otellini poo-pooed the idea, saying that ARM chip makers were missing 64-bit support, error correction, and other RAS features that would be necessary to play in the server racket, and while these were on their roadmaps, "the products that are being shipped today simply don't have those feature sets".

And even for those workloads where a collective of ARM servers might be appropriate, Intel is cooking up Atom processors with those server features – and full Windows Server and Linux support. "We have decided that we are just going to push Atom as hard as possible in this space, and have it be a better offering for our customers than having to switch all of their software and worry about all of the reliability features," Otellini said. ®

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