Intel to Buy Startup Nervana Systems in Artificial Intelligence Push

Chipmaker changes focus to the data center, cloud, and IoT businesses

Source: Nervana
Source: Nervana

Chipmaker Intel Corp. (NASDAQ: INTC), which makes chips that run more than 90% of the world’s servers, is seeking to become future-ready by tuning its chips and systems with artificial intelligence (AI) functionalities. As part of these plans, Intel announced on Tuesday, August 8th, 2016, that it has signed a definitive agreement to acquire startup Nervana Systems, a leader in deep learning and machine learning. The San Diego, California-based Nervana Systems will boost the deep learning performance of Intel Xeon and Intel Xeon Phi processors, as per Intel’s blog post. Nervana Systems will collaborate with Intel’s Data Center Group (DCG), which needs products with built-in AI services such as voice and picture recognition. Such AI functions are expected to become a bigger portion of the functions carried out by servers powered by Intel’s chips. Intel’s DCG is the Company’s most-profitable and fastest-growing business, growing 18% to generate $16 billion in revenues in 2015.

Intel latest acquisition is aimed at gaining expertise from Nervana Systems’ software, a cloud service, and future hardware to attune its products for AI functions. While Intel’s Xeon processors dominate in data centers, they currently do not have the capability to handle artificial intelligence calculations. Adding Nervana Systems’ products and expertise will help it gain a foothold in a rapidly growing market and fend off rivals such as Nvidia Inc. (NASDAQ: NVDA), if it can swiftly turn its acquisition into products. With the PC market shrinking, Intel is largely counting on its DCG to drive its future growth.

Push into artificial intelligence

Artificial intelligence, which encompasses computing methods like advanced data analytics, computer vision, natural language processing, and machine learning, is hastily gaining ground and transforming the way businesses operate.

Source: Company's Website
Source: Company’s Website

Machine learning and its subset deep learning are key methods for the expanding field of AI. Intel processors power over 97% of servers deployed to support machine learning workloads today. The Intel Xeon processor E5 family is the most widely deployed processor for deep learning inference. Moreover, Intel’s recently launched Intel Xeon Phi processor which delivers the scalable performance needed for deep learning training. While less than 10% of servers worldwide were deployed in support of machine learning in 2015, the capabilities and insights it enables makes machine learning the fastest growing form of AI. Hence, Intel’s potential acquisition of Nervana Systems is seen as a strategic fit to the chipmakers focus on AI.

About Nervana Systems

Founded in 2014, Nervana Systems has a fully optimized software and hardware stack for deep learning. Nervana Systems’ IP and expertise in developing deep learning algorithms will expand Intel’s capabilities in the field of AI. Nervana Systems’ engine and silicon expertise will advance Intel’s AI portfolio and enhance the deep learning performance of the Intel Xeon and Intel Xeon Phi processors. Investors in Nervana Systems include Global Playground, CME Ventures, Lux Capital, Allen & Co. and AME Cloud Ventures. Allen & Co. LLC is the exclusive financial adviser to Nervana Systems in the deal.

Intel’s change in focus

Intel announced on April 20th, 2016, that it plans to lay off 11% of its total workforce, or 12,000 employees, as it aims to emerge a nimbler organization with a focus on the data center, cloud, memory, and Internet of Things (IoT) businesses. The Data Center, Memory, and IoT segments accounted for 40% of Intel’s revenue and more than 60% of its operating profit in 2015. Additionally, these three segments together generated revenues of $2.2 billion in 2015. The Company is looking to move away from manufacturing chips for PCs, which still account for 60% of Intel’s sales and 40% of profits.

Source: Intel
Source: Intel

Intel expects to launch its Xeon E7 v3 processors power AWS’ X1 instance, a high-performance cloud for memory-intensive workloads, later in 2016.

With Intel firmly set on its growth path, the Company appointed Paula Tolliver as corporate vice president and chief information officer (CIO), replacing Kim Stevenson who will take on a new role at the company, on August 1st, 2016. Tolliver joins Intel from Dow Chemical where she served as corporate vice president of business services and CIO. As Intel’s CIO, Tolliver will report to Intel’s chief financial officer Stacy Smith.

Q2 FY16 financial results

Intel announced its Q2 FY16 financial results on July 20th, 2016. The Company reported a 3% Y-o-Y growth in GAAP revenue to $13.5 billion during the quarter under review. On the other hand, Intel’s operating income fell 54% to $1.3 billion and net income nosedived 51% to $1.3 billion versus the year-ago period. Consequently, GAAP EPS was down 51% to $0.27 versus $0.55 in the prior year quarter.

The Company generated $3.8 billion in cash from operations, and used $804 million to repurchase 26 million shares during the reporting quarter. Intel’s restructuring initiative is on-track to transform the company into an entity powering the cloud and billions of smart, connected devices. As part of its restructuring plan to lay off 11% of its workforce, the Company incurred a one-time charge of approximately $1.6 billion in Q2 FY16. However, with the acquisition of Altera completed in early FY16 and ongoing restructuring, Intel expects to save $750 million in FY16 and run rate savings of $1.4 billion by mid-2017.

Stock Performance

I4Intel’s stock stood at $34.68, gaining 0.43%, at the close on Thursday, August 12th, 2016, having vacillated between an intraday high of $34.74 and a low of $34.49 during the session. The stock’s trading volume was at 16,339,413 for the day. The Company’s market cap was at $163.98 billion as of Thursday’s close.

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