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Why did Intel start recording contra revenue?

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Intel’s Bay Trail platform cost issue

In late 2014, Intel (INTC) disclosed that its Bay Trail platform—that’s developed for Microsoft (MSFT) Windows and Google’s (GOOG) (GOOGL) Android tablets—is plagued with a cost structure issue. Intel stated that the Bay Trail platform’s bill of material requirements is way higher than other tablets that are prevalent in the market.

If you want to gain exposure to Intel, you can consider investing in the VanEck Vectors Semiconductor ETF (SMH) or the Powershares QQQ Trust (QQQ). Intel accounts for about 19% and 3.41% of these ETFs, respectively.

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Intel’s contra revenue caused a dip in its margins

Intel stated that it would ship ~40 million tablet computers in 2014. Instead, it shipped ~46 million tablet computers. However, despite the more-than-expected shipments, Intel’s Mobile and Communications Group, or MCG, suffered a huge loss due to Intel’s contra revenue. The contra revenue created quite an uproar in the market.

So, what exactly is contra revenue? Contra revenue is Intel giving away its Bay Trail chips to OEMs (original equipment manufacturers). It intends to push its chips in the market. It wants to gain tablet market share.

How contra revenue led to negative revenue

Let’s just assume a single Bay Trail chip costs $20. This makes 40 million “samples”—the company’s estimates to ship in 2014—worth ~$800 million. Let’s assume the cost of these parts is another $400 million. This makes a total loss of $1.2 billion because Intel is giving away these chips.

As a result, contra revenue—the amount Intel is paying to OEMs to integrate its chip, Bay Trail—actually led the segment to record negative revenue. The negative revenue is due to the costs and subsidies involved with Bay Trail.

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