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Intel Chief Defends Huge Mobile Losses

Ken Wieland
11/21/2014

SANTA CLARA -- Intel Annual Investor Meeting -- Intel CEO Brian Krzanich was forced to defend his company's mobile market chip strategy Thursday as he told investors and analysts that the US chip giant was on track to beat its aggressive target of shipping 40 million tablet chips by the end of the year, up from 10 million in 2013.

That rapid expansion into a market dominated by chip designs from UK-based ARM Ltd. has come at a price. Intel Corp. (Nasdaq: INTC)'s Mobile and Communications Group (MCG) racked up a whopping operating loss in excess of $3 billion during the first nine months of 2014, largely because of the company's strategy to subsidize chips to gain market share.

"I can't stand here and talk about the 40 million tablets without talking about the losses," said Krzanich, but he was far from apologetic. "We're not proud of it, but we're not ashamed of it either," he added.

The CEO reasoned it was better to muscle into the fast-growing mobile device market -- where it has struggled to make an impact -- and establish chipmaker and ODM/OEM partnerships, even if it did mean taking a hit on revenue and profit. He highlighted deals struck this year with Chinese chip suppliers Rockchip and Spreadtrum Communications to get a toehold in China's fast-growing smartphone and tablet markets. Krzanich hopes to exploit the two firms' close ties with local OEMs to sell Intel x86 products. (See Intel Invests $1.5B to Boost Its Mobile Assets and Intel Enters into Strategic Agreement with Rockchip.)

What might come as a surprise is how long Intel thinks it will take to turn MCG around. Stacy Smith, CFO, said he couldn't see MCG becoming gross-margin positive until "sometime in the first half of 2016." A ramp-up in LTE modem chips and a move away from subsidies -- which Intel euphemistically calls "contra revenue" -- should help MCG boost operating margin by $800 million in 2015, added the CFO, but that's still only a modest dent in an operating loss that's expected to top $4 billion for the group in 2014. "We're not where we need to be," admitted Smith, "but we are making progress."

Better MCG news for Intel shareholders is that SoFIA, Intel's system-on-a-chip (SoC) targeted at lower-end tablets (and potentially smartphones), will be available next year. A SoFIA version integrated with a 3G modem is scheduled to start shipping in the first half of 2015, said Krzanich, while an LTE version is due to follow "in the middle to latter half" of next year.

Intel's play in the tablet chip space has been mainly through Bay Trail, a product designed for the PC and high-end tablet market. To help drive Bay Trail adoption for various tablet market segments and lower price points, and so get a bigger footprint, Intel has needed to dangle the subsidy carrot, but Smith reckons SoFIA will avoid that.

"SoFIA's SoC cost is around one quarter that of Bay Trail and so is competitive at the system level," he said. "Our expectation is the new SoFIA platform will not have bill-of-materials deltas that will require contra revenue support."

That's not to say Intel's contra revenue days will be over when SoFIA arrives. The CFO pointed out that Bay Trail and Clover Trail (Bay Trail's predecessor) have scored "significant volumes" of design wins and will be shipping through the course of next year.


For more communications processor market coverage and insights, check out our dedicated comms chips content channel here on Light Reading.


The backdrop to Intel's investor day was Krzanich's decision, reported by the Wall Street Journal earlier in the week, to merge MCG with the PC Client Group (PCCG), a combination that will take effect next year.

The CEO insisted the reorganization was market driven, although it will have the happy side-effect of masking operational weakness at MCG: The PC group posted operating income of $10.7 billion during the nine months ended September 2014. Customers, maintained Krzanich, often see PCs, tablets and phablets as a set of products they would like to source from one location, and that, he said, was the thinking behind the merger.

Aside from MCG difficulties, 2014 has been something of a bumper year for Intel. The chip giant recorded its best-ever quarterly revenue performance in the third quarter -- $14.6 billion -- and passed the 100 million landmark for the number of microprocessors shipped over a three-month period (also in the third quarter). Intel anticipates full-year sales of $55.9 billion in 2014 and expects revenue to increase by a mid-single-digit percentage next year, better than Wall Street had expected.

That forecast, plus an increase in its quarterly cash dividend, gave Intel's stock a 4.7% boost late Thursday to $35.95, taking its market value to nearly $174 billion.

Krzanich said Intel had "driven stabilization into the PC market," helped by greater choice across more price points, but expected growth excitement to come from the data center and IoT markets. "The data center is Intel's next big business, which is already worth $14 billion [expected 2014 sales] and can grow at 15% CAGR through to at least 2018," said the Intel CEO. (See Intel Xeon Zooms Into Data Center Era, Intel ARMs Itself for IoT, SDN Opportunities, Driving the Network Transformation, Intel Wants to Light Up the IoT Market and AdaptiveMobile Joins Intel's NFV Network Builders Program.)

He thinks the company's IoT Group, already a $2 billion business, can grow at 20% a year, although he didn't specify a timeframe.

— Ken Wieland, contributing editor, special to Light Reading

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jabailo
jabailo
12/16/2014 | 5:17:22 PM
Re: Does Cloud mean smaller cpus?
No not at all...private clouds make a lot of sense to me as well especially for large companies.

 
Phil_Britt
Phil_Britt
11/30/2014 | 6:01:10 PM
Re: Does Cloud mean smaller cpus?
Letting the cloud bear the burden is good in theory, but I think the current IBM television advertising campaign makes some good points -- what if someone else on the same server has  something that goes viral? Your portion of the cloud is choked off. So everything in a public cloud doesn't make sense, though there's a lot to be said for hybrid clouds.
Kruz
Kruz
11/29/2014 | 9:19:06 AM
Re: Does Cloud mean smaller cpus?
AWS allows you to spawn your own instance in a sec, hosted and distributed over the cloud.

It's all bound to happen: in theory, there isn't a digital service been used that can't go over the cloud once regulations and security are tight.We'll be left with dummy terminals delivery a set of service directly from the cloud.
jabailo
jabailo
11/28/2014 | 8:12:25 PM
Re: Does Cloud mean smaller cpus?
How far can it go?

How about your own personal operating system, spun up from parts, instantly on demand?

As far as hardware, yes!  Why have anything more than necessary?   Let the cloud bear the burden.
SachinEE
SachinEE
11/27/2014 | 8:13:44 AM
Re: Does Cloud mean smaller cpus?
"I look at devices like the Chromecast and Fire TV sticks and wonder, is this the future?  Are these the first Things of the Internet?   Very low power endpoints that are almost entirely driven"

I think the IOT driven softwares will change in the form and usability, also with the hardware parts which will be more energy balanced and easy to use.
jabailo
jabailo
11/23/2014 | 11:03:17 AM
Does Cloud mean smaller cpus?
I look at devices like the Chromecast and Fire TV sticks and wonder, is this the future?  Are these the first Things of the Internet?   Very low power endpoints that are almost entirely driven.   With wireless Gigahoods, how long before the entire screen is hosted in the Cloud and computers and smart phones become nearly "TVs" just displaying a video rendering hosted on a Cloud and accepting keyboard, voice, mouse inputs.

Given that, the requirements for general processing on Things might drop, precipitously..a kind of inverted Moore's law would take place, at least for the things you and I would be using.
Ariella
Ariella
11/21/2014 | 11:34:50 AM
Re: Interesting outlook on IoT and Data Centers
Do you consider the projected annual growth rate of 20% realistic?
Ray@LR
[email protected]
11/21/2014 | 7:25:30 AM
Interesting outlook on IoT and Data Centers
Naturally a lot of focus on mobile but INtel's projectins for data center and IoT sales is interesting -- what will be more interesting will be to look back in a year and see if they wre on the money of if the market is growing even faster than INtel thinks it might.
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