Intel Plans Major Cuts in Overhaul
The chips are down at Intel Corp.
Chief Executive Paul Otellini said Thursday that he would cut annual costs by $1 billion and branch into new businesses as the chip-making giant undertakes the biggest restructuring effort in 20 years to better compete with nimbler rivals.
Lower profit margins, shrinking market share and slower computer sales have put pressure on Santa Clara, Calif.-based Intel, which missed profit and revenue estimates in its last two quarters.
“We are very well aware of the realities of our current and future business outlook, and we are taking actions to address these realities,” Otellini told semiconductor industry analysts in New York. “No stone will remain unturned. We will restructure, resize and repurpose Intel for the future.”
Otellini offered few details but said cuts would be made within three months and could involve shutting down underperforming units.
Intel is the world’s largest chip maker, with more than 80% of the market for computer processors, but in recent quarters, Advanced Micro Devices Inc. has gained ground at Intel’s expense. Sunnyvale, Calif.-based AMD has more-advanced server computer processors, outsells Intel in some retail categories and will introduce a dual-core 64-bit laptop processor ahead of its rival.
“AMD’s dollar share of the microprocessor market has increased in 11 of the past 13 quarters,” said Nathan Brookwood, principal analyst for Insight 64, a semiconductor consultancy. “The dollar share shift over the past five quarters is truly unprecedented and highlights the challenge Intel faces as it brings its next-generation products to market in the second half of the year.”
Intel shares rose 59 cents to $20.08 after Otellini’s comments.
The chip maker, long a specialist in semiconductors, is trying to reshape itself as a developer of “platforms,” or packages of chips and related technology aimed at particular customers. It has launched its Centrino and Viiv platforms for wireless and home multimedia computers, and on Monday announced the vPro platform to allow companies to manage small and large groups of desktop computers.
But analysts said Intel was in for a tough year because AMD would continue to innovate as Intel rolls out its offerings.
“We’re up against kind of a brick wall,” said Mike Green of Benham & Green Capital Management in La Jolla. “Otellini is talking about taking a billion [dollars] out of costs, about a $300-million reduction in investments in factory and equipment. Cost cutting is terrific, but it’s insufficient.
“I just don’t understand where it goes,” Green continued. “When you’re talking about microprocessors, you’ve got to be talking about the future, and new inventions and technologies and growth areas and products that are expandable, and Intel isn’t really talking about that.”
Some analysts were unconcerned about Intel’s prospects.
“I think it’s not urgent in the sense that something needs to be rescued,” said Graham Tanaka of Tanaka Capital Management in New York.
In presentations Thursday, Intel executives described new products expected to come out this year for desktop, laptop and server computers and discussed the company’s 2005 reorganization into business units that focus on the digital home and workplace, wireless technologies, healthcare and other areas.
“They really were saying things change, the industry changes, and they can do some things to improve productivity and efficiency, and to me that means improve their return-on-capital metrics,” Tanaka said.
