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Here's Why Intel Corp.'s R&D Spending Increased by $358 Million in 2017

By Ashraf Eassa – Updated Apr 17, 2018 at 4:42PM

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An increase in research and development spending is a sign that a company is investing in its future.

Chip giant Intel (INTC -2.31%) is one of the technology industry's biggest spenders on research and development. Its large budget fuels the company's investments in future chip manufacturing technologies, processor designs for a wide range of markets, wireless chips, non-volatile memory, and much more.

In 2017, Intel spent $13.1 billion on research and development -- a company record, and a $358 million increase from the prior year's total. In its Form 10-K filing, the company went over the key drivers of that increase in R&D spending.

An Intel Stratix 10 FPGA chip mounted onto a motherboard.

Image source: Intel.

Let's dive in, shall we?

Doubling down on data-centric businesses

Intel refers to its businesses that don't directly serve the personal computer market as "data-centric" businesses. This is primarily because these segments, like its data center group and its non-volatile memory solutions group, tend to focus on products and technologies that handle the storage and intelligent processing of massive amounts of data.

According to Intel's Form 10-K filing, part of the increase in research and development spending in 2017 was due to "investments in data-centric businesses, including the addition of Mobileye."

For some context, Intel acquired self-driving car platform company Mobileye early in 2017 for $15.3 billion. Mobileye's research and development spending during its last fiscal year as an independent company was $65.3 million, so the addition of this business was certainly a nontrivial part of the research and development spending increase that Intel saw in 2017.

Process-development costs

Intel claims that another part of the increase in its overall research and development expenses was driven by increases in spending related to the development of its upcoming 7-nanometer manufacturing technology.

After years of delays, Intel has yet to begin mass production of chips built using its 10-nanometer technology, but perhaps the chipmaker hopes to avoid some of the issues that plagued the development of its 10-nanometer technology by throwing more money at the problem.

Profit-dependent expenses

Intel also says that part of the increases that it saw in research and development were due to profit-dependent expenses thanks to "an increase in net income, excluding Tax Reform impacts."

Large companies often pay bonuses to employees and executives that are dependent, in part, on how well the company performs in a given year. The greater the profits, the greater those types of bonuses are, which naturally leads to higher expenses for the company.

Some offsetting factors

The $358 million increase that Intel referred to is a net increase. Since Intel cut expenses elsewhere, the increases in the areas mentioned above (process technology development, increases in data-centric business investments, and profit-dependent expenses) were, in aggregate, greater than $358 million.

Among the expense cuts Intel made were a reduction in operating expenses thanks to its divestiture of the Intel Security Group (formerly McAfee and once again McAfee, now that Intel no longer has a majority stake), and "cost savings from gained efficiencies," which is a euphemism for lower operating expenses due to the large reduction in force that Intel began in 2016.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

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