Bad News for HPE and IBM Isn't Necessarily So Bad for Micron and Nvidia

 | May 24, 2018 | 9:06 PM EDT
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Just as Microsoft's  (MSFT)   fortunes are much less tied to those of PC makers than they once were, suppliers of chips and hardware components used within data center gear need to worry much less than they once did about the quarterly sales of major enterprise server, storage and networking hardware vendors.

This has much to do with the heavy spending of cloud giants that often aren't keen about buying from traditional enterprise hardware vendors, but do still have quite the need for the chips, adapters, accelerator cards and controller cards made by their suppliers. It also has a bit to do with how industry trends are allowing some chipmakers to grow their enterprise revenue even as broader hardware spending is pressured.

Recent earnings reports shine a light on these trends. While IT giants such as Cisco Systems (CSCO) , HP Enterprise  (HPE)   and IBM   (IBM)   are contending with limited enterprise hardware sales growth in spite of favorable currency and cyclical trends, the likes of Intel   (INTC) , Micron  (MU)  and Nvidia   (NVDA)  have been offering upbeat numbers and commentary for their data center sales.

Intel's Data Center Group (DCG), which supplies server CPUs and complementary products, saw revenue rise 24% annually in Q1 to $5.2 billion. The segment's enterprise and government sales rose a modest 3% -- growth would have been lower still if not for a CPU upgrade cycle, and Intel has cautioned it expects enterprise sales to drop long-term as more server workloads move to the cloud. But this was easily offset by a 45% increase in sales to cloud service providers, and a 33% increase in sales to telecom service providers.

Micron reported its Compute & Network Business Unit, which supplies PC, graphics and server DRAM, saw revenue rise 15% sequentially and 93% annually in its February quarter to $3.7 billion. Strong pricing trends and healthy graphics memory demand certainly helped, but so did big cloud orders: The segment's "cloud server" revenue rose 28% sequentially.

Micron also reported its sales of cloud and enterprise solid-state drives (SSDs), recorded under another segment, more than tripled annually.

Nvidia reported its Datacenter segment revenue rose 71% in the April quarter to $701 million. Strong demand from cloud providers using Nvidia's GPUs for AI algorithm training and (to a lesser extent) inference work played a big role, but the company also indicated enterprise demand was healthy.

Broadcom  (AVGO) , meanwhile, forecast its giant Wired Infrastructure segment, which covers a variety of data center, broadband, optical and living room products, would see "strong double-digit" sequential growth in its April quarter, in large part due to a "very strong increase in demand" for networking offerings used in cloud and enterprise data centers. And Cisco switching rival Arista Networks  (ANET) , whose sales depend heavily on cloud giants, reported its Q1 revenue rose 41% to $473 million.

Certainly, heavy cloud capital spending has much to do with these numbers. The likes of Alphabet's Google (GOOGL) , Facebook (FB) and Microsoft have been reporting very strong capex growth, and chip equipment giant Applied Materials   (AMAT)  recently forecast the combined capex of the top seven cloud service providers would rise around 40% this year.

But some other factors are also helping. Intel's DCG, for example, is benefiting from favorable pricing trends that led its average selling price (ASP) to rise 7% in Q1. And its telco sales are getting a boost from network functions virtualization (NFV), which involves the replacement of proprietary telco gear with commodity servers (usually Intel-powered).

Nvidia's cloud sales are benefiting not just from data center buildouts, but from an AI arms race among tech giants that doesn't show any signs of letting up. And its enterprise sales are getting lift from both AI investments -- they've driven sales not only of Nvidia's standalone server graphics cards, but of its powerful DGX AI training systems -- and rising penetration rates for its server GPUs within high-performance computing (HPC) projects.

Naturally, these trends also serve to lift Micron's graphics memory sales. At its recent analyst day, the company forecast the average AI training server will consume a whopping 2.5TB of DRAM by 2021. Micron's data center sales are also benefiting from adoption of memory-intensive analytics and in-memory database workloads, and from rising SSD penetration rates.

To be fair, potential headwinds exist for some of these suppliers as well. Intel, for example, is at risk of losing some server CPU share to AMD  (AMD)   in both enterprise and cloud environments, particularly following the latest delay for its next-gen 10-nanometer manufacturing process. And while conditions still look pretty good for Micron's mainstay DRAM business, the NAND flash memory market has begun to soften a bit.

Nonetheless, it's fair to say that thanks to a cloud capex boom and other trends, conditions look much better overall for the data center businesses of firms like Intel, Micron, Nvidia and Broadcom than for many of their top historical enterprise clients.

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