Some Questions About Intel Corporation's Fledgling Foundry Business

By Ashraf Eassa Markets Fool.com

More than three years ago, microprocessor giant Intel (NASDAQ: INTC) told the world that it would "open foundry to any company able to utilize [its] leading-edge silicon."

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Image source: Intel.

In other words, it signaled to investors that it was ready to get more serious about trying to make money from building chips for other chip design houses.

Over the past several years, some companies have announced manufacturing deals with Intel's contract chip manufacturing division, called Intel Custom Foundry (ICF). These have typically been smaller chipmakers, often opting to build just a small portion of their product portfolios at Intel.

Back in August, Intel went into a little more detail on its strategy in regard to contract chip manufacturing. The company highlighted that its two focus areas for the business would be on mobile applications processors and on chips aimed at network infrastructure.

Although Intel has done a reasonable job of explaining its high-level strategy for this business, there's one thing that's been sorely lacking: a financial perspective.

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What I'd like to see Intel talk about

Every so often, Intel will talk about its technologies or even announce new customers, but it's hard at this point for investors to get a good sense of what kind of financial contributions Intel is expecting from this business over the long term.

Today, the revenue contribution from contract chip making is pretty much zero to Intel -- its highest-profile customer was programmable logic specialist Altera, but Intel scooped the company up before the first product of their collaboration emerged.

The Stratix 10 FPGA is built using Intel's 14nm technology. Image source: Intel.

Intel has said that China-based smartphone chip maker Spreadtrum and smartphone maker LG would be using building chips at ICF, although it will likely be some time before revenue from those customers starts coming in, since neither LG nor Spreadtrum has launched Intel-built products.

And, naturally, Intel hasn't given much guidance on what kind of revenue it expects to generate from these deals.

Although it's still early, at this point Intel should have enough visibility into its design win pipeline to get a rough sense of what kind of revenue and revenue growth trajectory it expects to see from its contract chip manufacturing business over the next couple of years.

With that in mind, here are the key points and questions I'd like to see Intel address at its February investor meeting in regard to ICF:

  1. When will Intel start to generate enough revenue from ICF so that those revenues are worth reporting to investors? What kind of revenue growth rate is Intel projecting from this business over the next three to five years?
  2. Does Intel believe that it can successfully win over major high volume mobile customers, such as Apple (NASDAQ: AAPL), Huawei, or MediaTek? If not, is this business still worthwhile to pursue?
  3. Can Intel successfully build chips for network infrastructure customers without significant risk of those customers competing with Intel's in-house products? Would Intel be OK with such competition?
  4. What kind of gross profit margin profile is Intel targeting from its ICF business?

Why this matters

If Intel can generate meaningful incremental revenue by building chips for others, then that would be a good way for it to increase shareholder value. However, before getting too excited about the prospects here, it'd be nice to see Intel provide some insight into what it's looking to achieve financially in this business, as this is what ultimately matters.

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Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.