Intel's mobile biz loses $1.12B in Q2 despite uptick in tablet sales

Intel's mobile business continued to bleed cash and its wireless-related revenue declined significantly in the second quarter even as the company as a whole reported strong earnings for the period. The company said it is making progress toward its goal of shipping its chips inside 40 million tablets in 2014--but it is currently losing money because it is paying OEMs to put its chip inside their tablets.

In the first quarter Intel started breaking out its Mobile and Communications group as a separate unit on its financial statement. The second quarter proved to be incredibly challenging for Intel on the mobile front, as the unit reported revenue of just $51 million, down 67 percent from the first quarter and down 83 percent year-over-year. To put that in context, Intel's PC group had revenue of $8.66 billion, up 6 percent year-over-year. Revenues from the company's data center business, primarily from server chips, clocked in at $3.5 billion, up 19 percent.

Intel's mobile group lost $1.12 billion in the second quarter, wider than the $761 million it lost in the year-ago period.

Overall, Intel reported a 40 percent jump in net income to $2.8 billion, up from $2 billion a year earlier, while total revenue rose 8 percent, up to $13.8 billion from $12.8 billion in the year-ago period.

The company is seeing a decline in its feature phone and 2G/3G business as the industry transitions to integrated LTE solutions, Intel CFO Stacy Smith said on an earnings conference call with analysts.

Intel CEO Brian Krzanich said that the company is working to get its next-generation LTE chipset, the XMM 7260, which supports Cat 6 300 Mbps speeds and carrier aggregation, qualified for use in devices. "So we kind of thought it was going to be the end of Q2," Smith said of the chip's certification, according to a Seeking Alpha transcript. "It's now going to be early part of Q3 and then we'll see a ramp that is offset. It's going to be more towards the end of this year or early next year."

In an answer to an analyst's question about Intel's poor showing in mobile, Krzanich said, "clearly, we don't go into businesses to lose money and we believe that over time we can make this a profitable business. We have some ground to make up both in getting our LTE to Cat 6 and in our products being specifically designed for this segment." Intel rival Qualcomm (NASDAQ:QCOM) is the clear leader in the LTE baseband market.

The Intel CEO also said the company is "squarely on track" to meet its 40-million-unit tablet goal after shipping 10 million units in the second quarter. The company also recently announced a strategic relationship with Rockchip to accelerate and expand its system-on-a-chip roadmap for the value and entry-level tablet market segment.

However, as Re/code notes, Intel's tablet business hinges on "contra revenue." Contra revenue is a financial term that denotes that Intel is basically paying tablet device makers to use its chips.

Krzanich said "we believe modems and connectivity in this space is critical to almost every segment of our business, but we also believe that we can be in this mobile space and make money. We just got to get our products there and get the right price structures."

Smith added that Intel needs to invest in the wireless market now and work to improve the mobile business' finances over time, because "if we don't have the ability to integrate in comms, I think three, four years from now we are locked out of large segments of the market. So it's a critical capability. That said, we acknowledge that's a big loss and our goal and our plans would suggest that we'll have a significant improvement in this segment next year. It won't be profitable but we should be able to improve it nicely next year and stay in a trend. That's what we're driving the business to."

For more:
- see this release
- see this Seeking Alpha transcript
- see this NYT article
- see this Re/code article
- see this separate Re/code article

Special Report: Wireless in the second quarter of 2014

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