At Intel's (NASDAQ:INTC) investor meeting, CFO Stacy Smith discussed how the chipmaker allocates its research and development spending. In particular, he talked at length about how much of the company's research and development spending consists of shared foundational investments.
More to the point, according to Smith, the "unique" R&D spending associated with the company's mobile efforts only amounts to about "$200 million per quarter," so roughly $800 million per year. However, he added that the mobile group receives a chunk of the large "core" research and development funding the company claims would be done regardless of whether Intel were participating in mobile.
Believe it or not, this is actually a pretty big deal.
Quitting mobile doesn't seem like a good idea anymore
The idea here is that if Intel were to shut down its mobile efforts tomorrow, it likely would not save anywhere near as much as the unit's large losses today imply. For example, this year, Intel's mobile group is on track to lose about $4 billion. Roughly $1 billion of that loss is reportedly due to contra-revenue payments that should disappear as Intel rolls out new, more cost-effective mobile platforms.
Removing the approximately $1 billion of contra revenue yields $3 billion in operating loss. If Intel simply shuts down its mobile efforts, then it would save that $800 million in yearly mobile group-specific research and development costs. It would also see cost reductions through elimination of sales, general, and administrative, or SG&A, expenses associated with the division. For the sake of conservatism, we'll suppose these costs are about equal to the research and development costs, or $800 million.
Removing the R&D and the extreme-case SG&A suggested above would bring the loss down from $3 billion to $1.4 billion. That $1.4 billion, which is presumably the mobile group's portion of the shared expenses, would then need to be reallocated to the remaining business groups.
Grinning and bearing it looks like the best option
Working under the assumption that Intel wouldn't scale back any of the shared R&D resources if it were to exit mobile, and using the assumptions from the prior section, it appears the company would save about $1.6 billion annually if it were to just quit mobile.
However, for a company like Intel, which even with these huge losses generates billions in operating income, it makes longer-term sense to just deal with the losses for now until its mobile-related revenue grows into that cost structure.
In fact, given that shutting down mobile completely would only lead to a savings that I believe is, at most, $1.6 billion, Intel would need to grow its mobile sales to about $3.2 billion annually at a 50% gross margin to have the same effect as outright exiting the business.
Is that number realistic?
It might seem that reaching $3.2 billion in mobile-related sales is a stretch, particularly given that the mobile group has generated just $208 million over the last nine months. However, I believe Intel's products in this space will grow increasingly competitive, and over time the company should grab more than enough share of the smartphone and tablet processor markets to make mobile a worthwhile venture.
Strategy Analytics predicts the smartphone applications processor market will be worth $30 billion by 2018 It also believes the tablet applications processor market will hit $7.2 billion in 2018. If Intel can capture just 10% of the combined market for both smartphones and tablets, the math done in this article suggests mobile will become a worthwhile venture for the company.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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.