Intel's (NASDAQ:INTC) recent earnings report was somewhat of a mixed bag, but one thing that stood out was a 61% year-over-year revenue decline in the mobile and communications group. This group includes Intel's Atom processors, and with the company looking to sell 40 million tablet chips this year -- good for 15%-20% of the market -- this revenue collapse seems to point to continued problems with Intel's mobile efforts. Coupled with the fact that the mobile group is currently losing in excess of $3 billion per year, it's getting more difficult to see a path to profitability for Intel's mobile business.
But Intel is playing to win, not simply dipping its toes in the mobile market. Reaching profitability will require the company to win a significant percentage of both the tablet and smartphone processor markets, something that will take years. Still, Intel's competitive advantages should give long-term investors a good reason to be optimistic.
Tablets are the first step
Intel's mobile group can't reach profitability by just focusing on tablets, but tablets represent the first step in Intel's plan to become relevant in the mobile processor market. Intel sold 5 million tablet processors in the quarter, with 80%-90% powering Android devices and the rest powering Windows devices. The company reiterated its goal of selling 40 million tablet processors in 2014.
Bay Trail, the most recent version on Intel's Atom processor, has yet to show up in any Android tablets. This means that the bulk of Intel's tablet processor sales during the quarter were older versions of Atom. Bay Trail introduces some serious improvements in energy efficiency and performance, as well as being 64-bit, so the first Bay Trail powered Android tablets to hit the market later this quarter will be a vast improvement over previous Intel tablets.
One reason why the mobile group revenue declined is because Intel is subsidizing its tablet chips, lowering the costs for OEMs to adopt Intel chips. As Intel works to bring down the cost of integrating Bay Trail, this subsidization should eventually no longer be necessary. Intel expects that by 2015, the negative effects will be either minimal or nonexistent.
Smartphones are next
Intel's long-term strategy is simple -- use its edge in manufacturing to make its own chips more attractive than the ARM-based competition. Intel should have little problem offering best-in-class performance for tablets, especially once the next generation of Atom processors hits the market. But smartphones pose a few problems for Intel.
Qualcomm (NASDAQ:QCOM) has managed to win such a big share of the smartphone processor market by providing to smartphone manufacturers an integrated product, combining the processor and the modem. This means fewer parts and lower costs. Qualcomm's leadership in mobile modems, as well as many of the other pieces that go into smartphones, has led to outsized profits for the company. Intel does not have a processor with an integrated LTE modem, and until it does, the company doesn't stand a chance in the smartphone market.
Intel plans to offer a mobile processor with an integrated 3G modem, called SoFIA, toward the end of 2014. This is aimed squarely at the low end of the market, and it won't challenge Qualcomm at the high end. Intel won't be manufacturing the chips, instead farming them out to TSMC, a move meant to both keep costs low and get the product to the market more quickly. In 2015, Intel should have a product with an integrated LTE modem, and it should also have moved to a 14nm process, at least for its higher-end products.
This is when things get interesting, because Intel will be ahead of the competition by at least a year in terms of the manufacturing process. There's no reason why Intel can't produce smartphone processors with superior performance per dollar and performance per watt. The 2015-2016 time frame is when everything starts to come together for Intel.
The bottom line
Intel's mobile strategy depends on winning a considerable share of the smartphone market, and that doesn't have a chance of happening for a few more years. Until then, the mobile unit is going to continue losing money, but there is a clear path to profitability. Intel is making a big bet on mobile, banking on its ability to widen its lead in terms of performance and power efficiency while integrating modems into its processors. If Intel can execute over the next few years, there's no reason why it won't succeed.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. 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.