For the past several months, Intel (INTC) has endured declining market share and a sagging stock price. Now, Chief Executive Paul Otellini is striking back. On Apr. 27, he outlined a plan to regain ground by reorganizing, cutting costs, and speeding up the pace of new product releases.
In a meeting with financial analysts, Otellini said he is spearheading a companywide effort to review Intel's business and structure. Over the next 90 days, he says, Intel managers will comb through the company's many business groups looking for savings and underperforming activities. "No stone will remain unturned," Otellini told the New York audience. "Anything with a bracket on it," he added, referring to losses, "is going to be looked at."
Why the scramble? On Apr. 19, Intel reported disappointing first-quarter results, with net profits down 38% from a year earlier, to $1.3 billion, on sales of $8.9 billion. It continues to lose share to archrival Advanced Micro Devices (AMD). Perhaps most worrisome to Wall Street, which loves Intel's rich profits: Gross margins, the wellspring of Intel's juicy returns, slipped from the 59% forecast in January to just 55% by the end of the quarter.
FALLING HEADCOUNT. Investors and analysts had already heard some of the new plan during Intel's earnings call. But Otellini and Chief Financial Officer Andy Bryant went further on Apr. 27, spelling out goals to lop $1 billion out of operating expenses this year, for a total of $12 billion, and to reduce capital spending by $300 million. Bryant also said he expects Intel's headcount to fall by 2% to 3% in 2006, primarily through attrition. The company now employs around 100,000 people worldwide. Intel shares rose 3% on Apr. 27 after the news.
The move is the latest in a series of shakeups at the Santa Clara (Calif.)-based chip giant since Otellini took over as CEO a year ago. One of the most noteworthy was his decision in January to re-brand Intel's flagship PC chips, dropping the venerable Pentium moniker and lesser-known Celeron in favor of separate names for different market segments(see BW, 01/09/06, "Inside Intel"). Intel will now offer processors dubbed Core for general-purpose desktops and notebooks, Viiv for multimedia PCs, Centrino for wireless-enabled notebooks and portable devices, and the new vPro brand announced this week for business PCs.
Otellini's belt-tightening takes places against a backdrop of rising microprocessor production costs. For the rest of this year, Intel will be ramping up facilities to produce chips with circuits just 65 nanometers wide, the next generation. At the same time, it's expanding production of dual-core processors, or chips with two central brains instead of one. Both of these transitions cost big bucks, and Intel's production expenses are expected to peak in the third quarter, Bryant says. After that, improved efficiency and more experience with the new technology should start to bring costs down.
AMD ATTACK. Intel also must contend with ever-stiffer competition from AMD. The Sunnyvale (Calif.) company has grabbed several points of market share from Intel in the past few years, particularly in the server arena, with its Opteron 64 line of chips. That trend continued in the first quarter, when AMD's share of Windows-compatible PC, desktop, and notebook processors grew to 22.4%, up from 16.4% in the fourth quarter of 2005, according to market analyst Mercury Research.
How does Intel explain the market share loss? It's not because AMD has better chips, insists Otellini. Rather, he and Anand Chandrasekher, vice-president and head of sales and marketing, blamed a shortage of Intel chipsets -- the semiconductors that connect the microprocessor to other parts of a PC, including memory and graphics systems. Because Intel couldn't make enough of these, the executives said, PC makers turned instead to AMD processors and third-party chipset makers. But Intel vows it now has the supply problem under control, and that it will start recovering lost market share in the third quarter.
Otellini's long-term plan to fight back against AMD is to accelerate product development. On Apr. 27, he said Intel plans to push out major revisions of its chip designs every two years. That's a significant change: The current line of chips, for instance, builds mostly on the six-year-old design of the Pentium 4 processor.
ON TRACK. Intel already is on track to release new versions of its server chips in June, a new desktop PC chip in July, and a notebook chip in August, Otellini says. The next major step forward will take place in a forthcoming architecture codenamed Nehalem. Due in 2008, it will use circuits just 45 nanometers wide, nearly one-third less than the current 65-nanometer process. Another revision is set for 2010, when Intel aims to shift to 32-nanometer technology in a chip design codenamed Gesher, Otellini says.
This acceleration is possible, says analyst Doug Freedman of American Technology Research, because Intel is now building chips for servers, notebooks, and desktop PCs around common design elements. "All three types are really built around the same processor core, and that should really help lower the cost of microprocessors," Freedman says. On the other hand, he worries whether software companies will have trouble keeping pace. "If you're coming out with a new platform every two years, you have to wonder if the food chain is going to be able to absorb all those changes fast enough to keep up."
Will the combination of cost-cutting and acceleration be enough to kick-start Intel's results and stock performance? Analysts responded positively but cautiously to the latest developments. Lehman Bros. analyst Tim Luke said in a research note that he expected the tactical update, "with its focus on new products cost control," to be viewed as "broadly constructive by investors." Still, he cautioned, the recovery will depend "clearly on execution." In other words, the devil is in the details.
Intel's CEO sounded a similar tone. No soaring rhetoric or lofty promises about the shimmering digital future. "We are well aware of the realities of our current and future business outlook, and we are taking actions to address these realities," he intoned. Save the visioneering for later; these days, it's nuts-and-bolts time at Intel.
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