Intel, Microsoft face challenges in shift to cloud

Financial results from Microsoft Corp and Intel Corp this week brought into sharp relief the challenges the onetime PC partners face as they shift more of their emphasis to cloud computing.

Microsoft has seen strong long-term growth in parts of its cloud business, a combination of services and software catering to corporations moving computing functions to remote data centers run by outside providers.

While revenue for its flagship cloud services business Azure more than doubled last quarter, the company said in Thursday’s earning report, the “intelligent cloud” division that includes it saw just 3 percent revenue growth in the period. And operating profits for the division dropped by 14 percent, in part reflecting non-cloud products included under its umbrella, such as traditional server software.

Chipmaker Intel has a less clear path to growth for its cloud operations, and investors have remained skeptical.

The company’s share price is down about 1 percent over the last year, as software maker Microsoft’s stock rose about 30 percent. Microsoft's market capitalization of around $440 billion is almost three times Intel's at $151 billion, compared to about double five years ago.

"Wintel" computers running Windows on Intel chips dominated the personal-computing era, which is slowly ending as more people turn to mobile phones for computing needs and corporations deemphasize desktops. Both Intel and Microsoft, run by relatively new CEOs Brian Krzanich and Satya Nadella, are betting their businesses on the cloud.

Graphic on Intel and Microsoft market value: here At Intel, in a quarter where the company announced plans to cut 12,000 jobs as it shifts away from the PC, data-center business revenue rose 9 percent to $4 billion. That segment includes the chips powering cloud data centers, where the company says it is doing well.

“There’s this perception that Microsoft is more on the cusp and benefiting from this (cloud) trend,” said Dan Morgan, a fund manager at Synovus Trust Co who holds both companies in his portfolio. “Intel is still more drowned out,” meaning not as high-profile. Microsoft’s best-known play in the cloud is Azure, a set of services for computing and storage as well as tools for software developers. Azure is gaining ground on Amazon's AWS unit, the industry heavyweight in cloud computing services. Azure commands about 10 percent of the $23 billion market, estimates Synergy Research, compared with AWS’ 31 percent.

Intel has done well in its category, dominating the market for processor chips that are the brains of data center computers, but the business faces major pressures. Much of the difference in the companies' fortunes boils down to Microsoft’s fundamental business as a software company versus Intel’s as a hardware company, said Nick Sturiale, a venture capitalist at Ignition Partners. Clients are spending an ever-larger part of their technology budget on software, according to research firm Gartner.