Intel Corporation (NASDAQ:INTC) is targeting 40 million mobile chips for tablets and smartphone in fiscal 2014, but the company is making inroads into the industry by subsidizing its partners, which is putting pressure on revenue and generating losses. The company may eventually achieve its target, but it will come at a cost.
Intel may beat target, but is losing revenue
In the third-quarter, the chip maker performed well on many fronts as the PC corporate upgrade cycle thrived and data center processors and its Internet of Things efforts drove growth. Mobile and communication revenue, however, came in low at just $1 million with an operating loss of $1.04 billion.
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For the nine months ended September 27, losses borne by Intel Corporation (NASDAQ:INTC)’s mobile chip division totaled to $3.1 billion on revenue of $208 million. The current situation suggests that Intel will probably outperform the target of powering 40 million smartphones and tablet processors, but lose around $4 billion for the year, says a report from Zdnet by Larry Dignan.
The chip maker is offering subsidies to partners, which means that it is practically giving away the processors to partners and recording the transactions as “contra revenue.” The vendor is entitled to refunds and rebates from Intel when it uses the company’s mobile processors. Furthermore, if devices fail to sell, Intel offers a refund to the partners such as Lenovo or Dell. This accounting treatment offers better insight into the actual demand and revenue for Intel from mobile processors.
Things to become clearer in 2015
Most analysts are not criticizing the Intel Corporation (NASDAQ:INTC)’s strategy of offering the subsidy because it is important for the firm to gain market share. Intel CEO Brian Krzanich said that company is expecting to ship 10 million to 12 million mobile processors in the fourth-quarter to hit at least 40 million units for the year. Krzanich said, “We’re not going to necessarily try and blow the number out, but we’re also not going to miss it by a million or two. So my guess is somewhere between 40 million and 45 million is where we will end up.”
The question arises here is how long will the strategy continue? In 2015, the latest chips from Intel won’t come with subsidies, so revenue might go up, but this scenario assumes that the chip maker is able to sell the mobile processors without the subsidies, says the report. The company is also betting on growth in the Internet of things to support mobile unit sales.