Intel Chief Defends Huge Mobile Losses
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.
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