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An Update on Intel Corporation’s Mobile Progress

By Ashraf Eassa - Jul 29, 2015 at 11:00AM

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Intel's mobile group still doesn't seem to be firing on all cylinders, but it's at least making financial progress.

Investors who have been following Intel ( INTC 3.53% ) probably know that the company has been trying to break-in to the market for ultramobile processors for years. The company has invested heavily in this area, but so far it has yet to achieve the kind of market share and, ultimately, financial success that it may have had in mind several years ago.

In fact, last year, Intel's mobile group posted an operating loss in excess of $4 billion.

The good news, though, is that the 2014 loss is probably as bad as it will ever get. Intel executives signaled that this loss will come down by about $800 million as a result of lowered operating expenses and reduced tablet processor subsidies in the year.

On Intel's most recent earnings call, company executives updated investors on how this operating loss reduction is progressing. Let's take a closer look at what they had to say.

The loss reduction for 2015 is still on-track
According to CFO Stacy Smith, Intel is still on course to bring down its mobile-related operating losses by $800 million this year. Additionally, he said that one-third of that reduction, which would be about $267 million, has materialized so far.

Interestingly, Smith indicated that the company's first 3G-capable Atom x3 processors have been shipping in the market since the first half of 2015, and that the ramp of those products delivered the "vast majority of the improvements in margin dollars and contra-revenue dollars."

In other words, the delay of the company's LTE-capable Atom x3 parts into 2016 announced on the earnings call won't impact its mobile-loss-reduction efforts for the year.

New stand-alone modem on-track to ship this year
On the call, CEO Brian Krzanich said that the company's category 10 LTE-Advanced modem, known as the XMM 7360, is "on track for shipments to customers this year."

The good news is that, as I've written about before, the XMM 7360 looks like a solid step forward in Intel's quest to become a leading vendor of cellular baseband solutions. 

The bad news, however, is that although the 7360 looks like a good successor to the company's prior generation 7260 (which seemed to be a solid product), I'm not convinced that it will have much of an impact on the company's top and bottom lines.

There seem to be only a few high-volume designs that utilize stand-alone cellular modems (the largest of which is the iPhone), and unless Intel can win one or more of them, it probably won't be able to bring in substantial revenue and profit dollars with this part (or future stand-alone modems). 

Nevertheless, Intel's modem technology development efforts are important from a longer-term strategic perspective. Even if there isn't much of a market for higher-end stand-alone cellular basebands, there is a huge market for low-end and mid-range integrated mobile applications processors and modems.

The better Intel's modem capabilities are, the more competitive its future integrated applications processor and modem parts will be.

More on Intel's mobile loss reduction plans in November
Krzanich indicated that Intel will outline its plan to further reduce its mobile losses at its investor meeting this year. Although the loss reduction in 2015 seems to depend mostly on the abatement of contra-revenue subsidies and operating expense cuts, this stunt really only works once.

In 2016, I expect part of the loss reduction will come from the complete eradication of contra-revenue from the company's mobile group. But if Intel plans to continue to fight to get into the mobile market, it still needs to make sure it is spending at a level that allows it to successfully produce and market competitive products.

In this spirit, as an Intel investor, I hope that Intel's 2016 mobile loss reduction will be at least partially fueled by a solid increase in revenues and gross margin expansion from negative levels to somewhere solidly in positive territory. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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