Intel on track to cut $800M in mobile losses, but will still pay to get its chips inside devices

Intel said it remains on track to cut $800 million in losses from its mobile business this year as it ramps up production of its chipsets for entry-level phones and tablets. The company, which reported first-quarter earnings yesterday, also said it will continue to pay device makers to put its silicon inside their gadgets, but it will do less of that this year than it did in 2014.

Overall, Intel said net income for the period grew just 3 percent year-over-year to $2 billion on $12.8 billion in overall revenue, which was flat from a year ago. Intel disclosed that operating income for its client computing group dipped 24 percent in the first quarter, while sales fell 8.3 percent. Intel recently merged its PC business with its smartphone and tablet chipset businesses so the PC segment was likely dragged down by the mobile portion. Intel said that it shipped chips inside 7 million tablets in the first quarter, up 45 percent year-over-year.

Intel CEO Brian Krzanich said the company merged its PC and mobile units because customers like Lenovo and Acer view phablets, tablets and low-end PCs as essentially all one platform. "They look at all of those platforms as the same type of hardware," he said on the company's earnings conference call, according to a Seeking Alpha transcript. "And they want to have a single group that they interface with and so our customers wanted this."

Krzanich also said Intel could save costs by merging the two units. The practical financial reporting effect though is that Intel no longer breaks out its mobile business as a separate unit. Intel's mobile grouped reported $4.2 billion in losses in 2014. Intel aims to cut those losses by $800 million this year.

At Mobile World Congress in March Intel unveiled three new Atom-based mobile processors called the x3, x5, and x7, in addition to a new 7360 LTE modem. The x3, which had been named "SoFIA" for 3G devices, is designed for low-cost smartphones, phablets and tablets. Intel has said it has 20 customers committed to deliver designs based on the x3, and that chip is expected to boost Intel's market share in the entry-level smartphone market this year.

On the earnings call, Intel CFO Stacy Smith said Intel's chips will be inside products with higher margins this year.

Intel racked up losses in mobile last year by effectively subsidizing device makers that put its higher-powered chips into lower-end devices. Now that it has a chip designed for that segment, Intel will be spending less money on engaging in that practice, known as "contra revenue," Smith said. However he acknowledged that Intel is "planning to pay contra revenue dollars associated with the SoFIA shipment."

Intel will start to see the financial benefit of that in the second half of the year, Smith added. "The product mix, SoFIA reduction in contra revenue dollars, really kicks-in in the back half of the year," he said. "So, it's more a back-end loaded of course based on the SoFIA ramp."

There has also been speculation that Intel will have its 7360 modem chip ship inside a special version Apple's (NASDAQ: AAPL) next iPhone that will be marketed to emerging markets in Asia and Latin America. Financial analysts did not ask Intel about that but the company has declined to comment on the topic. Intel was also not asked about reports that it had broken off talks to acquire Altera, which makes chips used in base stations.