For the longest time, it wasn't quite clear just how much Intel's (NASDAQ:INTC) mobile group was losing. Indeed, since the mobile group's results were part of the "Other Intel Architecture" group for the past several years, it was hard to separate that division from the more profitable "intelligent systems" group. Intel has now reorganized its reporting to give investors more clarity on what exactly is going on.
A big, gaping loss -- when does the pain end?
During 2013, Intel's Mobile and Communications group generated $1.375 billion in revenue. On that revenue base, Intel lost $3.15 billion. Now, without knowing the gross margin profile of that division, it's hard to get a handle on the operating expenses. That being said, if we assume that the division (which mostly consists of low-end 2G/3G modems and a handful of apps processors) does gross margins in the 40% range, then this would suggest operating expenses of about $3.7 billion.
For Intel to break even -- assuming that operating expenses stay roughly flat -- at about the 50% gross margin level, the company would need to do about $7.4 billion annually. Now, do keep in mind that this represents a pretty serious chunk of the mobile market (modems, connectivity, and apps processors), so it'll take quite a bit to get to breakeven, let alone profitability.
What kind of market share does Intel need?
According to Strategy Analytics, the smartphone apps processor market is set to be worth a whopping $30 billion by 2018. The tablet processor market should be worth a cool $7.2 billion by 2018, again according to Strategy Analytics. If Intel can capture 35% of the tablet apps processor market and about 25% of the smartphone apps processor markets, that works out to over $10 billion in sales for the company -- not even including discrete cellular modems.
That may seem aggressive, but given the trajectory Intel is on with both its tablet and smartphone offerings, getting this kind of share in tablet/phone apps processors actually seems quite reasonable. This is a long-term game, however, and investors shouldn't expect wild profitability over the next few years (although the massive losses should come down nicely over the next couple of years).
Is it time to freak out?
Many will rightly note that Intel's mobile group losses are so wide that they wipe out over half of the operating profit of the company's datacenter business. However, focusing on short-term profits and ignoring the long-term strategic goals is the key to failure. Intel knows it needs to be a big player in both smartphones and tablets; otherwise it risks irrelevance. Intel is spending what it needs to in order to win, and long-term investors should understand that these "big losses" are a necessary move.
Indeed, with mobile-chip giant Qualcomm (NASDAQ:QCOM) investing probably at over $3 billion a year and given its first-mover advantage, it's neither easy nor cheap to catch up with such a behemoth. Qualcomm's mobile IP is best-in-class from the CPU to the modem, and developing all of that and building upon it requires a large investment. But if Intel's investments are successful, there will be a great long-term payoff.