Intel Corporation's Shared IP Model Explained

By Markets Fool.com

At Intel's investor meeting late last year, both CEO Brian Krzanich and CFO Stacy Smith talked at length about the company's "shared IP" model. The idea is that the company develops a core set of intellectual property, such as processor cores, graphics blocks, and so on, and uses those as the foundational building blocks of the company's product portfolio.

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According to Smith, the cost to actually put together a "broad set of IP" (IP stands for "intellectual property") is very high, but once that foundation is in place, the investments required to go after new markets are manageable. Smith cited the company's data center business as a prime example of this model, and suggested that the company's data center operating margins (which were recently slightly over 50%) benefited from this model.

Let's take a closer look at what Smith had to show on this topic.

Examples of this sharing
To illustrate this IP sharing in "real world" product terms, he showed the following slide:

Source: Intel.

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On the left is the Haswell GT3e chip (found in the 15-inch Retina MacBook Pro), on the top right is one of Intel's high-end server chips, and on the bottom right is Intel's Bay Trail chip, aimed at tablets.

The blue boxes represent IP that are PC-specific (and have been reused elsewhere), the gray boxes represent IP designed for a specific market segment, and the green boxes represent mobile-focused IP that ended up feeding back to the company's PC products.

As you can see, Intel reuses blocks that it designs for one product or market segment in other product segments.

What does this mean financially?
Smith proceeded to show the following slide, which helps give a clear picture of how Intel views its research and development expenses in the context of this "IP reuse."

Source: Intel.

According to this slide, over half of Intel's $11 billion in R&D spending during 2014 represented "foundational investments." This includes the fundamental manufacturing technology used to build the company's products, CPU cores, validation and testing, and so on.

Including what Intel terms as "shared platform investments" (this includes Wi-Fi, Bluetooth, LTE, graphics, and so on), the total "shared" investment level looks to be just under 75% of the company's total research and development spending. This means that just over 25% of Intel's research and development spending is segment-specific.

How does this apply to mobile?
Intel's high profit margins as well as its strong market share positions in the PC and server markets show that a lot of good can come from having large foundational investments that are properly leveraged in many markets. However, investors might note that these investments haven't quite paid off in terms of success in the mobile group, which lost $4.2 billion in 2014.

Interestingly enough, Smith pointed out that over half of the company's mobile-related research and development spending is part of the foundational and shared platform investments illustrated above. This, according to Smith, means that although it might be a while before the mobile group generates enough revenue to technically beprofitable, it won't take as long for the mobile group to cover the spending beyondthe shared spending required to be in the market.

The article Intel Corporation's Shared IP Model Explained originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends 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.