How Intel Corp. Is Shuffling Around Its Spending

By Ashraf

In his very helpful presentation during Intel's most-recent investor day, CFO Stacy Smith spent some time discussing how the company is changing up how it spends its operating expense budgets. In particular, the executive talked about where Intel would be bolstering its investments, and where the company is cutting back spending.

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Let's take a closer look at how the company is reshuffling its investments, why it's doing what it's doing, and what the long-term implications are.

Lots of interesting shifts happening between 2014 and 2016Smith presented the following slide to illustrate how the company's spending will be shuffled around:

This image depicts R&D and MG&A spending shifts. Source: Intel.

Although Intel didn't provide a precise scale here, Smith indicated in his presentation that the increase in spending in the company's Data Center Group (or "DCG") shown here is good for "well over a billion dollars." This allows us to get some sense of how large these shifts in dollar terms are.

Let's talk increases firstAs far as spending increases go, the area in which Intel is increasing its investments most is in DCG. This isn't a surprise given that Intel views this as its primary growth engine in the years ahead. Intel's revenue in this business is quite large, and its margins extremely high, and there seem to be significant growth opportunities ahead.

In this business, Intel is both trying to defend its market segment share in the market for server processors against potential competitive threats, and is, at the same time, trying to continue to grow its share of the roughly $18 billion networking-chip market.

In order to continue to stay ahead of the competition, as well as to try to gain share in new segments of the market, the company is rightly growing its investments. A prudent move, in my view.

Intel is also increasing its spending in the Internet of Things. The company has traditionally addressed this market with chips repurposed from its other business units, but I believe that the company is going to be more aggressive in building targeted solutions for this market, driving research and development spending up substantially.

The opportunity seems to be worth it, though. During the company's 2014 investor meeting, Internet of Things Group (or "IoTG") general manager Doug Davis said that, in 2015, Intel's served addressable market (or "SAM") would be in the range of $11 billion to $13 billion.

Intel's share in 2014 was around 17% per Davis' presentation last year, and given the company's projected spending increases from 2014 to 2016, it seems that the company wants to try to further boost its market share here. Given the size of this opportunity, this is a sensible move.

Next up, Intel says that it's increasing its investments in "technology development," which refers to chip-manufacturing technology development. The company already spends quite a lot here -- in 2012, Intel said that its annual spending here was north of $2 billion-- and it looks like the company is just upping its investments further.

New manufacturing technologies are becoming increasingly difficult to get into production at good yield rates, so it would be surprising if Intel weren't steadily increasing its investments here over time.

Moving on, Intel is also boosting its investments in "multicomms" -- which I take to mean cellular modems, as well as other kinds of connectivity such as Wi-Fi, Bluetooth, GPS, and so on. The company appears to believe that connectivity will be a crucial part of many different computing applications -- ranging from smartphones to the Internet of Things; hence, the increased spending there.

Finally, Intel says that it's increasing its investments in memory technologies such as NAND flash and 3D XPoint, particularly as memory is an important part of just about any computing platform.

Now, let's see the decreasesThe first area where Intel seems to be lowering its spending is in its Software and Services Group ("SSG"). This is a business that, for quite a while, hasn't really been all that profitable, but it seems that Intel is trying to change that by reducing unnecessary spending. The division is expected to be much more profitable in 2015 than it has been in the past, and I suspect that the company wants to continue to grow profits here at a steady clip in the coming years.

The next segment of Intel's business that is seeing spending cuts is the PC business. I don't take this to mean that the company will be letting up on investments in core foundational IP, such as CPU cores, graphics, and so on, but investments in platform-level items -- like RealSense cameras -- will probably come down.

Given that management isn't counting on its PC business to grow in the coming years -- though I am sure the company will continue to try its best to grow it -- it only makes sense to try to run as tight a ship as possible.

Finally, Intel seems to be slashing its investments in phones and tablets by about as much as it is increasing its spending in DCG. Intel is investing in communications technologies, and Client Computing Group chief Kirk Skaugen indicated that the company is still dedicated to investing in its SoFIA product line -- integrated mobile applications processor and modem -- so it isn't leaving the market.

However, I think that Intel's ambitions in the market for mobile chips, both smartphones and tablets, have been scaled back quite significantly, as the spending cuts clearly indicate.

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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.

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