Intel Corporation and the Reporting Segment Change

By Markets

Intel issued a press release stating that when the company reports its first-quarter earnings results, it's going to combine its PC Client Group with its Mobile and Communications Group into a single group known as the Client Computing Group.

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Some believe this is a way for Intel to "hide" its mobile-related losses, which came in at about $4.2 billion last year. However, while as an investor, I did very much enjoy the transparency that came with reporting mobile as a separate division, I think I understand why the company is changing it up.

The mobile losses are a bit overstated
If you listened to Intel CFO Stacy Smith's presentation at the company's investor meeting last year, you might recall that the mobile "loss" isn't all attributable to mobile-only efforts. Indeed, the former "Mobile and Communications Group" bore the burden of a significant piece of Intel's overall research and development for foundational technologies and competencies.

For example, Intel executives said that the mobile group is allocated portions of the research and development costs associated with new chip manufacturing technologies as well as processor, graphics, and other platform-level functionality.

In fact, Smith made a point to say that the "mobile-specific" spending -- that is, spending that would go away if Intel were to decide to shutter its mobile effort altogether -- was in the ballpark of a few hundred million dollars per quarter.

The losses are also quite high as a result of the contra-revenue Intel had to pay per tablet chip sold. This by no means accounted for most of the loss, but I believe Intel had indicated in the past that the contra-revenue and related activities accounted for about a $1 billion impact to the bottom line.

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The contra-revenue is supposed to be short-term to compensate for some cost-structure issues with Intel's platforms. Within a couple of years, contra-revenue should be well behind Intel and its shareholders. From a long-term financial perspective, Intel's mobile group should get an "easy" $1 billion (or whatever the actual figure is) in operating profit improvement once the contra-revenue is gone.

Conceptually, this makes sense
Intel didn't break out its revenue in PCs into desktops and laptops; it just reported all of its PC-related chip revenue under the "PC Client Group." The rationale seems to be that tablets and phones share much of the same fundamental technology that goes into PCs (for example, Intel's Atom CPU cores can be found in everything from phone processors to desktop processors), so why not include it all under one reportable segment?

This makes conceptual sense. Further, if you think about it, this is how other semiconductor companies, particularly those trying to expand into adjacent markets, do it.

Qualcomm , for example, lumps all of its chip-related financials under one reportable segment. It doesn't distinguish between chips sold into phones, tablets, or even automotive applications. Revenue from these chips simply falls under one reportable segment.

Interestingly enough, consider that Qualcomm is seemingly investing considerable resources to enter into the server market. Right now, Qualcomm is probably spending significant amounts on research and development there, but it doesn't have products out or, more importantly, revenue to show for it.

If Qualcomm were to break out its "data center" efforts, you would see effectively zero revenue, relatively high operating expenses (particularly if Qualcomm allocates shared costs in a similar manner to what Intel did with mobile), and a sizable loss. Maybe not on the order of billions, but I don't think it would be trivial.

If Intel is hiding mobile losses, it's also hiding crazy-high PC profitability
The final point worth noting is that if Intel is really trying to "hide its mobile losses," then realize that by combining the PC division with mobile, it will also be "hiding its PC profitability."

Intel's PC division generates significant revenue and operating profit, and by lumping it in with the mobile group -- which generates very little revenue and has very high fixed operating costs -- this will serve to mask the true profitability of its PC division.

To borrow the old saying, "there's no such thing as a free lunch."

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