Last quarter, microprocessor giant Intel (NASDAQ: INTC) reported seeing a 4% increase in the average selling prices of the chips sold by its Data Center Group (DCG).
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Average selling price growth had been a key part of the revenue growth story in DCG in previous years, though unit growth has been important, too, but throughout most of 2016, what revenue growth that Intel enjoyed here was due largely to unit shipment increases.
Intel's data center group average selling price and unit changes in each quarter of 2016, year over year. Data sources: Intel releases.
Average selling prices declined in the first, second, and third quarters of the year -- though unit growth in the first and third quarters was reasonably robust. In the fourth quarter of 2016, year-over-year unit growth was low, but Intel resumed growth in average selling prices.
On Intel's most recent earnings call, management went into some detail on what drove the average selling price story in the fourth quarter -- let's take a closer look.
Two major factors
CFO Robert Swan explained that there were two key drivers of the increased average selling prices in DCG during the fourth quarter.
First, he said that the transition of the company's product line from its older Haswell-architecture based server products to its newer Broadwell-architecture based server products "is helpful."
A wafer of Intel server chips. Image source: Intel.
"Those dynamics where we're delivering better performance for our customers, we're able to capture some of that in [average selling prices] and we saw a little bit of that in the fourth quarter," Swan explained.
It's worth noting, though, that the same Haswell-to-Broadwell transition that's starting to give Intel a nice tailwind in average selling prices is also leading to higher product manufacturing costs, which is negatively affecting product margins.
Next, he said that within the communications and networking portion of the company's data-center business, Intel is "getting those clients to move up the stack in terms of high-performance server products."
In the past, Intel has said its share gains in the networking market have served to dilute to overall average selling prices within DCG, so it's interesting to see that those customers are now apparently starting to buy a richer mix of products.
Swan added that both factors are "helpful" as Intel exits 2016 and looks toward 2017.
Looking ahead to Skylake
After Swan had given his commentary, CEO Brian Krzanich provided some insight into the average selling price dynamics that the company expects in DCG during the second half of 2017. Krzanich highlighted that the company will be transitioning to a new processor architecture during the second half of 2017, known as Skylake.
"That is a technology that will increase performance and the performance per cost to our customers in one of the largest improvements in a long time, if not ever, in the data center," Krzanich said.
He went on to explain that the company expects that because of this new product line, "people will see the value" in higher-performance products, and "they tend to buy up, they tend to buy the better" stock keeping units.
All of that, Krzanich indicated, means that "the trend of higher [product] mix should continue" in 2017.
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