Intel‘s (NASDAQ: INTC) data center group (DCG) has enjoyed solid revenue growth over the last several years as two key dynamics have played out: growth in server processor unit sales and growth in the average selling prices of those processors.
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The rise in average selling prices is generally attributed to data center customers seeing value in buying higher-end processors for their data centers (as more expensive, higher-performance processors can sometimes lead to a lower total cost of ownership).
An Intel server processor. Image source: Intel.
During Intel’s Feb. 9 investor meeting, DCG chief Diane Bryant highlighted a surprising way that the company is working to help drive up the average selling prices of its server chips.
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A sales and marketing team boost
Bryant started off by explaining that the recent priority change, which made DCG the highest-priority business unit within the company, bolstered its DCG-specific sales force."We now have a dedicated data center sales force focused on our customers," Bryant said. She also added that the headcount increase was on the order of 20% — a sizable jump.
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Of course, adding more sales personnel to the team means that operating expenses are going to go up, too. Those increased expenses need to pay off in the form of enough additional revenue to, over the long haul, drive gross profit up by more than what the company needs to pay the new sales team members. According toBryant, those increased investments are already paying off."What we have seen is with direct account coverage of the next wave of the cloud service providers so beyond the Super Seven — the next 100 cloud service providers, the [average selling prices] increased 32% in [Intel’s fourth quarter] year-over-year."
Of course, it’s not likely that the 32% increase in average selling prices will translate completely into a 32% increase in Intel processor revenue; the cloud customers may have opted to buy processors higher up in the product stack, but they may also have bought fewer processors/servers in exchange.
Nevertheless, I’m sure that Intel has priced its chips in such a way that buying up the stack is a win for both the customer and Intel — it would make little sense for Intel to spend all this time and effort educating customers on how to spend less money on Intel processors!
Why is that working so well?
Of course the result that Bryant describes is encouraging, but if you’re like me, you’re curious to know why the increased sales force has led to such nice results. Fortunately, Bryant explained that, too."So, when we have Intel going in to the cloud service providers, helping them understand how to drive up performance and lower their total cost of operation, we see our [average selling prices] go up as they move up the [product] stack," she said.
Bryant also pointed out another benefit to this new engagement model: Intel apparently sees its "share of wallet," or as she explains, "the portion of products that they buy [from] Intel also goes up."Translating that into how Intel reports financials, the higher average selling prices should translate into higher CPU or "platform" revenue, while the higher "share of wallet" should translate into solid growth in the company’s non-CPU products, the subsegment of DCG that Intel is banking on for a significant portion of its overall DCG growth through 2021.
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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.
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