Intel rides the cloud to a record quarter

Intel was firing on all cylinders last quarter, as a jump in margins, productivity, consumer and business demand, and investment returns all combined to rocket the chipmaker to its best quarter ever. Revenue was up across the board, in both clients and servers, on strong demand for the company’s 32nm products. PC client revenue was up 2 percent, but the real action was in the company’s server business. Businesses may not be hiring yet, but Internet data centers are growing, and the two phenomena may actually be connected.

Time and again throughout the company’s earnings call, Intel made reference to the fact that the cloud infrastructure build-out is ramping up, and that the Xeon is quite popular with Internet service providers. It’s also the case that the company’s newer Xeon products offer such a power efficiency boost over the previous generation that cloud customers are upgrading their legacy systems, thereby adding to demand. Given that companies in every sector of the economy would rather sit on cash right now than invest in new IT infrastructure, it’s probably the case that the very same uncertainty about the business climate that’s preventing companies from hiring is also fueling demand for cloud services and, by extension, for Intel chips. When credit is tight and you’re not sure if your income is going to fall off a cliff again, it’s just better to rent than to own, and the cloud lets companies rent.

The one segment of Intel’s product line that outdid servers in terms of sequential growth was Atom, which saw a 16 percent boost in revenues that Intel attributed to demand for the new dual-core parts. When the company was asked about the contribution of “embedded” flavors of Atom, Intel CEO Paul Otellini revealed that the impact of non-netbook products like GoogleTV was quite small this quarter, and it would be next year before such products would “move the needle” in Atom units.

All told, the end of the second quarter really saw demand pick up across all geographies and segments. The company had some trouble with the EU market earlier in the year, as the volcano threatened to disrupt the economy and the euro crashed against the dollar, making Intel products more expensive. But by the end of the second quarter demand had picked back up, and Otellini told analysts that it appears that businesses may be doing server refreshes.

Intel management had an interesting exchange in the Q&A session with an analyst who asked if the uptick in server sales was destined to be followed by an corresponding uptick in client sales, on the theory that servers were being refreshed first, then clients. Intel’s response was that this connection had been true in the past, but now many of the server chips were going into servers that host applications delivered via a browser, so there’s no need for an upgrade on the client end. In the post-cloud world, clients don’t need to be upgraded until there’s a new OS from Redmond.

In all, it was quite the blow-out quarter for Intel, and both Intel and AMD stock were up in after-hours trading.