Technology

Intel Turns Bearish


It's belt-tightening time at Intel. With a gloomy forecast for growth for the rest of the year, continued strong competition from arch-rival Advanced Micro Devices, and its own sharply higher spending, the Santa Clara (Calif.)-based chipmaker is undertaking a major review of operations for the first time in about two decades -- a move that could signal possible job cuts.

The news from Intel (INTC

) CEO Paul S. Otellini came on Apr. 19, after the chip giant reported first-quarter earnings that just matched already-lowered expectations. For the three months ended Apr. 1, Intel reported net income of $1.3 billion, or 23 cents a share, on revenue of $8.9 billion. The revenue figure is down $500 million, or 5% from a year earlier, amid a precipitous drop in sales in Europe and to a lesser extent Asia. Profit tumbled 38%, reflecting newly expensed stock options.

Intel execs were quick to play down market-share gains by AMD (AMD

) (see BW Online, 3/06/06, "AMD Chips Away at Intel"), attributing a bearish outlook to sharply falling forecasts for overall market growth this year. Stockpiles of unsold PCs for smaller makers also have ballooned in recent months and will take another quarter to work off, Intel said. The moderating PC market tracks with Microsoft's (MSFT

) recent decision to delay the release of Vista, its next operating system for consumers, until 2007.

COUNTING ON CHIPS. Still, an Apr. 19 report from researcher Gartner showed that AMD continued to gain share in the first three months of 2006, the seventh consecutive share-size increase. And part of the problem appears to be Intel's own making. The company has been touting plans to roll out a powerful new, energy-sipping chip architecture across desktop, notebook, and server platforms beginning sometime in the summer. Analysts say that could be prompting many buyers to hold off purchases. "They are waiting for new chips and for a reason to upgrade," says Doug Freedman, an analyst at American Technology Research.

Indeed, Intel sharply tempered expectations for a rebound in the current quarter. Chief Financial Officer Andy Bryant predicted revenue of between $8 billion and $8.6 billion, down 7% from the weak first quarter. Worse, margins are expected to fall to 49% -- downright paltry for a company that typically enjoys gross margins on its chips closer to 60%.

Revenue for the full year could fall 3%, Intel said, after earlier forecasting a gain. "This is a year of determined resolution," Bryant said in a conference call with analysts. "We are determined to compete now. This will require discipline, methodical focus."

AVOIDING LAYOFFS? Otellini suggested even more change is at hand. Intel will "look at every aspect of our operations" over the next couple of months and shed underperforming businesses while trimming spending, he said. While Intel added nearly 20,000 employees last year as it moved to break into consumer electronics, communications, and other new businesses, Bryant said layoffs may not be necessary. Instead, the company is likely to freeze hiring and winnow its numbers through attrition, he said.

Wall Street for weeks has been concerned that as Intel rolls out new products in the second half it will launch a price war to win back share against AMD. Otellini, in the conference call, did not rule that out, saying he will do whatever it takes to keep the chipmaker's factories full.

AMD, which also is increasing its factory capacity, would likely match any such moves. No chipmaker wants idle plants. Sunnyvale (Calif.)-based AMD plans to offer more details of its own roadmap at a technology day for analysts in June.

COURT CLASHES. The acrimonious history between the world's top two microprocessor companies also is set to play out in courts around the world. A federal judge in Delaware on Apr. 20 will hold an initial status conference on an AMD lawsuit accusing Intel of coercing PC makers into using Intel's chips to the exclusion of AMD. Similar allegations are being examined in a Japanese court, while European and South Korean investigators have opened antitrust investigations against Intel.

Analyst David Wu at Global Crown Capital says none of that will stop Intel from regaining lost share beginning later this year. He's optimistic Intel will benefit from its promised lineup. "Better products get more market share," Wu says.

But given the tenor of Intel's call with analysts, the road back to success may be a rocky one indeed.


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