Intel Digs Out from a Pile of Chips

With declines in semiconductor revenues from a glut of unsold chips, Intel looks to workforce cuts and new efficiencies for help

Capping a five-month strategic review, chipmaker Intel is cutting its global workforce by 10,500 people by the middle of next year in a broad corporate restructuring that aims to cull $2 billion in operating expenses in 2007 and $3 billion by 2008.

The announcement caps a process first announced by CEO Paul Otellini at an analysts meeting in New York in April, describing how several business units at Intel (INTC) were under scrutiny (see, 4/28/06, "Intel on the Offensive"). Since then Intel has sold off some divisions, including its wireless chip operation to Marvell (MRVL), responsible for the XScale chips used by companies like Palm (PALM) and Research In Motion (RIMM), and its telecommunications division. The Sept. 5 cuts include employees transferred to Marvell and 1,000 managers Intel fired quietly earlier this year.


  When completed, the cuts will leave Intel's head count at about 92,000 by 2008, down from more than 102,000 at second quarter's end in 2006. "These actions, while difficult, are essential to Intel becoming a more agile and efficient company, not just this year or the next, but for years to come," Otellini said in a statement.

The Santa Clara (Calif.) company said most of the jobs lost in 2006 will come in management, marketing, and information technology. By 2007, it said cuts will affect the company more broadly in an attempt to boost manufacturing efficiency and how it uses equipment. Better efficiency in its manufacturing processes will save it $1 billion, Intel said. The company said it expects $200 million in severance charges, which will offset some of the savings. Citing a quiet period—Intel is due to report quarterly earnings on Oct. 17—the company declined to elaborate on other specifics of the announcement.

The shakeup comes less than 16 months into Otellini's tenure as Intel's chief executive, which has been marked by frequent shakeups since he took the reigns from former CEO and now chairman Craig Barrett. The first major change of the Otellini era was a substantial rebranding of Intel's product line: Out went the widely recognized brand name Pentium and in came new brand names like Core and Core Duo for personal computer chips (see, 1/9/06, "Inside Intel").


  The source of Intel's troubles was plain from a study published Tuesday by market research firm iSuppli, which showed that Intel had experienced a sharp decline in semiconductor revenue in its most recent quarter by more than 12%, from more than $8 billion to just more than $7 billion. ISuppli said Intel's share of the global semiconductor market—encompassing not only microprocessors but memory and others chips—also dropped, to 11.4% from 13.2%.

ISuppli analyst Dale Ford said price pressure and unsold inventory were the primary reasons for Intel's diminished status. "There have been substantial price cuts that have hit both Intel and AMD, and then there's the issue of unsold inventory," Ford said. "Manufacturers are waiting for the new chips to come out and slowed down their purchasing in the second quarter."

The corporate restructuring is also hitting Intel at a moment when its commanding lead in the overall market for the chips used in personal computers and servers has faded in the face of competitive pressure. Most notably, that's come in the server business, where rival Advanced Micro Devices (AMD) has seen its popular line of Opteron chips erode Intel's lead (see, 9/5/06, "The Iceman Cometh at Intel?"). Recently, Dell (DELL)—long a company Intel counted as an exclusive customer—added AMD chips to its server products and has promised to do so in its desktop PC lines as well. Additionally, companies like Hewlett-Packard (HPQ), Sun Microsystems (SUNW), and IBM (IBM) have renewed or expanded their commitments to use AMD chips. AMD is building a new factory in Germany to meet the demand.


  For its part, Intel's restructuring plans may include delaying new factories in Arizona and Israel. Raymond James (RJF) analyst Ashok Kumar issued a research note predicting that Intel's plans to expand manufacturing operations will slow. A factory under construction in Israel and due for completion in 2008 may not be used immediately, he said.

Merrill Lynch (MER) analyst Joe Osha, in a research note, said Intel should consider selling the unit that makes NOR-type flash memory. NOR-type flash is different from NAND-type flash, the type of memory chip used in MP3 players like Apple's (AAPL) iPod nano. NOR-type flash memory is used primarily as a read-only memory device for storing and executing the operating instructions for devices such as wireless phones. AMD last year spun off its NOR flash unit, which is now known as Spansion (SPSN). Dumping the NOR flash business and curtailing other nonessential business units would help Intel's bottom line, Osha wrote.

"Intel's flash memory and 'other' segments reported operating losses of $800 million in Q2, as compared to $1.9 billion in earnings for the two core businesses," Osha wrote. "If we assume that Intel manages to separate itself from the NOR flash business, and additionally that the losses from the various science projects in the 'other' segment are cut to zero, Intel has 2007 earnings power of $1.37 (per share) on revenue of $36 billion."

Additionally, Ford said Intel has a huge glut of unsold chips in its pipeline. A separate iSuppli study reckoned that the electronics industry has about $3.1 billion worth of chips waiting to be sold, more than half of which—about $1.56 billion worth—are Intel's.

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