Intel's Q3 results underscore challenge in mobile

Recovery in personal computers helps company beat street expectations

Intel's mobile and communications group took in a scant $1 million in revenue in the third quarter, underscoring the challenge the top chipmaker faces expanding into smartphones and tablets.

The Santa Clara, California-based company on Tuesday reported third-quarter results that beat Wall Street's expectations, helped by a recovery in personal computers, by far its largest market.

Progress in Intel's smartphone and tablet strategy was less clear. The mobile and communications group had an operating loss of $1.04 billion for the September quarter, worse than a $810 million loss the year before.

The company in recent years was slow to recognise the significance of the smartphone revolution, and CEO Brain Krzanich, who took over in 2012, has accelerated efforts to catch up by subsidizing costs for tablet manufacturers that use its chips.

Smartphones and tablets account for a tiny fraction of Intel's business, but the company sees staking out territory in mobile as key to emerging markets such as wearable computing products.

Intel is using its deep pockets to help it reach its goal to see its chips used in at least 40 million tablets this year, up from 10 million in 2013.

The vast majority of smartphones and tablets are made with processors based on rival technology from Britain's ARM Holdings Plc Britain's ARM Holdings .

Intel's subsidies are meant to reduce the burden to manufacturers of designing tablets with Intel's current chips, which require more expensive memory and other components that it says drive up costs.

Intel says its future chips will be more cost-effective for manufacturers and will not need subsidies in order to sell.

"The strategy is that over time, we think we can give better performance, more features in that segment of the market and so we wanted to start the work of building our footprint," Intel CFO Stacy Smith said in a phone interview.

Besides tablet subsidies, Intel's mobile and communications group is feeling the pinch from slower sales of 2G and 3G chips as cellphone makers move to more advanced 4G technology. Qualcomm has a major lead in 4G technology over rivals including Intel.

Intel's subsidies have made it the largest maker of tablet chips after Apple , which uses its own chips in its iPads, according to market research firm StrategyAnalytics.

On a conference call with analysts, Krzanich said that by year end, Intel might slightly exceed its 40 million tablet goal.

The subsidies, which Intel calls "contra revenues", will drop off as tablet makers switch to Intel's more cost-effective chips, Intel says.

"Based on the new platforms coming to market in the back half of this year and early next year, we expect those contra revenue dollars to start to wane pretty significantly," Smith said.