Intel's (NASDAQ:INTC) data center segment is the company's most promising business. It's large, it's growing quickly, and it's exposed to many long-term positive secular megatrends. Intel reports fairly detailed information about this business, including both trends in server chip/platform unit volumes, and average selling prices.
In Intel's most recent quarter, the company saw unit volumes surge 13% year-over-year, but average selling prices dropped by 3%. This was in contrast to the trend seen in previous quarters, when unit volume growth was less impressive but average selling prices grew.
Let's take a closer look at what's actually going on here.
Strong networking growth drove this
According to CFO Stacy Smith, the networking chip sub-segment within Intel's data center group saw growth of 60% year-over-year, dramatically outpacing the growth seen by the data center group overall.
Average selling prices for networking chips, as management has explained in the past, tend to be lower than the prices seen elsewhere in the business.
Don't fret, average selling prices within each segment continue to go up
Although in the first quarter, Intel saw overall average selling prices drop due to a higher mix of networking chips sold relative to chips sold in other segments, Intel CEO Brian Krzanich explained why investors shouldn't actually worry.
"When you take a look at the Data Center, it's not just one product," Krzanich began. "It's a family of products that really span from Xeon Phis [for high performance computing] that sell for several thousand dollars to networking processors that are a few hundred dollars at times."
"But within each one of those families, so whether you have networking or cloud or hyper-scale or enterprise computing, our [average selling prices] are increasing," said Krzanich.
This continued rise in average selling prices per segment, according to the executive, is "mostly due to [Intel] bringing in better products, people buying up the ladder in product."
An example of moving up the stack
Intel's naming convention for server processors is quite straightforward. For example, one fairly high-end server chip that the company sells is branded Xeon E5-2697 v4. The last bit, "v4," indicates that this is the fourth iteration of this chip model.
Generation-on-generation (i.e. Xeon E5-2697 v3 to Xeon E5-2697 v4), Intel doesn't tend to increase pricing all that much, if at all. However, with each generation, the processor with a given model number tends to see a performance increase through the use of better CPU cores and typically more of them.
What Intel claims is happening is that when server customers go to upgrade, they aren't just moving to the newer, faster versions of what they had before. They are instead buying processors with higher model numbers than they did the last time they bought processors.
Interestingly, in a 2014 presentation targeted toward investors, Intel data center group chief Diane Bryant claimed that between 2010 and 2014, a full 70% of the shipment volume moved up the stack.
This trend appears to still be in place based on the aforementioned comments from Krzanich, a clear positive for Intel.
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.