Intel's (NASDAQ:INTC) current Xeon Scalable data center processor lineup has proven to be a success for the chipmaker. During the first three quarters of 2018, the company has seen its data center group (DCG) platform revenue grow 26% compared to the first three quarters of 2017, with platform unit volumes surging 15% and average selling prices rising 10%.
On the company's most recent earnings call, CFO and interim CEO Bob Swan noted that Intel "[continues] to see strong adoption" of its current Xeon Scalable products -- which are also referred to by their code name, Skylake-SP -- "while we work with customers to get ready for the transition to Cascade Lake."
Swan summarized the improvements the company plans to deliver with the upcoming Cascade Lake processor as follows (emphasis added):
Cascade Lake introduces hardware-based side channel mitigation, Intel [deep learning] Boost with 11x inference speed up, and a revolutionary new technology, Optane DC Persistent Memory. And we're deepening our engagement with customers on custom SKUs. In fact, we'll have 60% more custom SKUs in the Cascade Lake family than the prior generation.
That last part is worth taking a closer look at.
Intel's custom processor work
Earlier this year, Intel hosted an event called the Data Centric Innovation Summit, during which several company executives presented information about their respective businesses. At the event, Intel VP Raejeanne Skillern, the general manager of the company's cloud service provider group, talked about the Intel's efforts around custom SKUs.
The executive said that "50% of our [processor] volume is optimized spanning over 10 different cloud service providers and nearly 30 different SKUs in addition to the SKUs that you saw that cover our standard road map."
"These are off-road map SKUs because they're customized uniquely for the service provider and they provide differentiation so it's unique to them and they want to keep it off road map," she added.
Skillern then explained that the company's customization ambitions extend beyond building custom SKUs. She observed the following about the role intellectual property, or IP, is playing in Intel's customization:
We have taken this and built the capability to deliver semi-custom products as well. We can integrate the [IP] from our customers, we can mix-and-match our Intel [IP] and we can integrate other third party [IP], we have packaging technologies, and we can hone a product -- a semi-custom product, now, not just tweaking knobs -- specifically for our customer base.
Intel's customization depth shouldn't surprise investors
Intel makes a lot of money from DCG. During the first three quarters of 2018, this business has generated $16.92 billion in revenue -- 32.4% of the company's total -- and $8.42 billion in operating profit. The company wants to do everything it can to keep its customers happy and keep that business growing, especially in the face of "growing competition," as Swan described it on the Oct. 25 call.
I'd imagine that the SKU ramp-up Swan mentions above indicates that Intel is planning to build custom SKUs for more customers than it currently does. Being more aggressive in tailoring products to customers' needs seems like the prudent move.
Investment in the development of custom SKUs certainly takes work and probably isn't cheap. But given the importance of this business to Intel's financial performance today, the resource allocation should be well worth the effort and cost.