Arguably Intel's (NASDAQ:INTC) most promising business is its data center group, or DCG. Unlike the company's large-but-shrinking PC business, DCG is large (though not as large as PCs), growing, and exposed to a number of markets that should continue to enjoy rapid secular growth for years to come.
One part of Intel's DCG growth story has been that the company has seen its platform average selling prices rise quite nicely over the years as customers opt to buy higher-up in Intel's server product stack.
Interestingly, after many quarters of year-over-year increases in server platform average selling prices, Intel reported during its fourth quarter that average selling prices (ASPs) actually declined by a modest 1% year over year.
On the surface, this looks like a bad sign for Intel's DCG, but it's really not. Here's why.
A shift in segment mix
According to Intel CEO Brian Krzanich, the slight decline in ASPs was "mostly driven by the much higher growth rate in the networking [segment]."
He noted that the ASPs of chips aimed at the networking segment are generally lower than those of chips sold to major cloud-computing customers or to enterprise server customers. Krzanich attributed the weaker average selling prices in networking compared to other sub-segments of DCG mainly on the fact that networking customers tend to buy more Atom-based server chips than buyers in other segments do.
That being said, even though the higher mix of lower ASP networking chips dinged overall average selling prices, Krzanich said that within networking, average selling prices were up. The executive said that customers within networking are increasingly buying up the stack to Core-based server processors due to the increased performance requirements of network function virtualization (NFV) and software defined networking (SDN).
How is 2016 looking?
On the call, Krzanich said that Intel "hopes" and "expects" the trend of ASP increases to continue during 2016 as the company continues to gain share there (Intel ended 2015 with sub-10% share in the networking segment, per management). He also believes that in both cloud and enterprise, the company will continue to see average selling price growth as customers continue to buy up the product stack.
Indeed, in the networking space, I expect that Intel will more aggressively ramp its Core-based Xeon D processors, which should deliver substantially more performance than the current Atom-based networking chip (known as Rangeley). It wouldn't be at all surprising to see demand shift from Atom-based chips to higher-performing (and higher ASP) Xeon D chips in this segment during the course of 2016.
Relax, Intel's DCG story is still intact
Although it is very disappointing that Intel didn't achieve its 15% growth target in the data center group, I do think that overarching story is still intact: the company continues to build increasingly compelling products and there still appears to be significant total cost of ownership savings associated with buying higher performance processors within the company's lineup.
Additionally, Intel noted on its earnings call that around 40% of the company's server chip shipments to cloud customers (expected to be roughly a third of total DCG revenue in 2016) were custom models. I suspect that as the proportion of customized chips continues to go up, so too will Intel's average selling prices/margins within this segment.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.