Intel records just $1M of mobile revenue in Q3, but points to brighter days ahead

Chipset giant Intel reported just $1 million in revenue in its mobile and wireless business in the third quarter, thanks in large part to the subsidies it is paying tablet makers to include its silicon in their products. However, Intel executives indicated better days are ahead for the mobile business as the company works to move into lower-cost smartphones starting later this year. Meanwhile, Intel announced a deal with AT&T Mobility (NYSE: T) and Asustek for AT&T to launch an Intel-powered smartphone.

Overall, Intel's third-quarter net income jumped 12 percent to $3.32 billion from $2.95 billion a year earlier, while sales increased 7.9 percent to a record $14.6 billion in the quarter. Revenue at Intel's PC group rose 9 percent year-over-year to $9.2 billion, indicating surprising growth in the PC market. The company's Internet of Things group posted revenue of $530 million, up from $64 million a year ago.

However, in mobile Intel continues to struggle. The company's mobile group recorded revenue of $1 million, compared to $353 million a year ago, and the mobile group's operating loss was $1.04 billion in the quarter. That's down from $1.12 billion in the second quarter but up from $810 million a year ago.

Currently, Intel's tablet and wider mobile business hinges on what is known as "contra revenue." Contra revenue is a financial term that indicates Intel is basically paying tablet device makers to use its chips. Intel CFO Stacy Smith explained during the company's quarterly earnings conference call that the subsidies Intel pays are recognized when products ship, and right now Intel is subsidizing the majority of its shipments.

Intel CEO Brian Krzanich said on the call that Intel shipped its chips inside nearly 15 million tablets in the quarter. He said the company remains on track to hit its 40 million unit goal for 2014.

In phones, Krzanich said the company is working on its SoFIA product, which stands for "Smart or Feature phone with Intel Architecture." The chipset technology is designed to go into entry-level smartphones that cost as little as $50 in emerging markets. That could put pressure on Qualcomm (NASDAQ:QCOM) and MediaTek, which dominate that part of the market.

The Intel chief said the company is on schedule to have the 3G version of SoFIA out at the end of this year, and to have the LTE version in the market in the first half of 2015. Smith said that as SoFIA-based products ship, Intel's subsidy cost per unit will come down, which should improve Intel's mobile financials. Still, Smith conceded the mobile unit will likely report a loss in 2015.

Intel is also banking on growth in the Chinese market, much as Qualcomm and other chipset makers are. Recently, Intel said it would spend up to $1.5 billion to purchase a 20 percent stake in Tsinghua Unigroup in China in a move the company said will help it sell chips to Chinese smartphone makers. Tsinghua Unigroup is a state-run company that owns China's second- and third-largest chip designers, Spreadtrum Communications and RDA Microelectronics. Intel also earlier this year announced a strategic relationship with Rockchip in China to accelerate and expand its system-on-a-chip roadmap for the value and entry-level tablet market segment.

Additionally, Krzanich said that Samsung Electronics is using Intel's Category 6 LTE modem with carrier aggregation, known as the XMM 7260, in Samsung's recently announced Galaxy Alpha and Galaxy Note 4 phones. "The strategic importance of these capabilities continues to grow. Our LTE technology, which we originally developed for phone, is becoming increasingly valuable in tablets and even PCs as wireless wide area network connectivity becomes increasingly common," he said, according to a Seeking Alpha transcript of his remarks. "We estimate for example that by 2018 the rate of baseband attached to tablets will roughly double and that PCs will rise to more than 15%."

Meanwhile, AT&T and Asus announced the PadFone X mini, which is the first smartphone for the U.S. market powered by an Intel application processor and an Intel LTE solution. The phone will be available for $200 without a contract starting Oct. 24 on AT&T's GoPhone prepaid brand. Asus had partnered with Qualcomm for earlier versions of the PadFone X.

For more:
- see this Intel release
- see this Seeking Alpha transcript
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this separate WSJ article (sub. req.)
- see this AT&T release

Special Report: Wireless in the third quarter of 2014

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