September could turn out to be the cruelest month for nearly 10,000 Intel employees, if speculation that the world's largest chipmaker is about to embark on a massive layoff program proves correct. Intel (INTC) has been expected to wield the ax for some time. On Apr. 27, Chief Executive Paul Otellini told analysts in New York that Intel was undergoing a wide-ranging review of its operations, and that "everything with a bracket around it" would be examined (see BusinessWeek.com, 4/28/2006, "Intel On the Offensive").
Since then, Intel has sold off its communications chips division to Marvell (MRVL) and its telecommunications division to Eicon Networks. Rumors have also been flying about a sale of its flash-memory chip unit (see BusinessWeek.com, 6/7/06, "A Flash Sale For Intel").
Meantime, Otellini has shuffled his executive team and fired 1,000 managers. Now he is expected to cut as much as 10% of Intel's global workforce, a belt-tightening move in the face of an increasingly punishing slugfest with rival Advanced Micro Devices (AMD).
AMD is certainly on a tear. As of the end of the second quarter, it had grabbed as much as 21.6% of the combined market for server and PC chips, up from less than 17% for the same quarter a year previously, says research firm Mercury Research. Much of AMD’s gain has come at the expense of Intel, which, for its part, still held a commanding 72.9% of the market, down from 82.2% a year ago. (A third company, Taiwan's VIA Technologies, had an atypical 5.5% share because it shipped an unusually large number of chips that quarter.) (See BusinessWeek.com, 8/22/06, "AMD's Race For The Server Space").
MIRROR IMAGES. AMD’s gains have hurt Intel’s bottom line, too. In the second quarter, all the key metrics were down from the year-ago period: Sales, at $8 billion, were down 13%; operating income was down 60%; net profit was down 57%; earnings per share down 55%. For the third quarter, Intel said it expected sales of $8.3 billion to $8.9 billion and a gross margin of 49%, vs. sales of $9.96 billion and a gross margin north of 59% in the third quarter of 2005.
AMD’s financials have been headed in the opposite direction (apart from gross margins, which dropped slightly during the second quarter, from 58% to 56.8%). Sales in the second quarter hit $1.2 billion, and operating income was $102 million, vs. sales of $779 million and operating income of $83 million in the year-ago quarter. (Comparisons of the periods are a little tricky because AMD spun off Spansion, its former flash-memory division.)
Now, just as the PC industry heads into its busiest season, AMD has just landed its biggest customer yet: Dell (DELL). The chipmaker also has been winning interest from the likes of Hewlett-Packard (HPQ) and IBM (IBM).
Intel's only major new customer is Apple Computer (AAPL). "Intel and AMD are more competitive than they've ever been," says Mercury analyst Dean McCarron.
AMD ON THE ASCENT. Not that Intel has been sitting still. By some measures, it has taken back the pole position in the race to have the very fastest chips on the market. But that hasn't yet beaten back AMD's momentum in servers.
Selling more servers can generate more corporate PC sales, says Nathan Brookwood, head of market research outfit Insight64, based in Saratoga, Calif. "AMD has always done well with consumers, but it was never in any large corporate accounts," he says. "It's a huge opportunity for AMD and one that Intel stands to lose."
Others think Intel will have a hard time roaring back, despite the financial savings from all the layoffs. "I'm skeptical of Intel's ability to ever regain any significant piece of the market share it has lost," says Brookwood. "AMD has moved from being a low-cost provider of chips for low-cost consumer PCs to being a credible competitor in every segment of the market that Intel serves. I don't think Otellini can change that."
Nor will his job be made any easier by the prospect of softening demand in the PC market, which Mercury's McCarron says may be on the horizon for the coming 6 to 12 months. "The results for the current quarter depend a lot on September," he says. "If it’s weak, then we'll probably be looking at a weaker-than-usual fourth quarter and probably a weak period in the first half of 2007. And that will only add to the difficulties faced by both Intel and for that matter AMD."