Intel’s Cuts Not Enough for Investors
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When Intel Corp. Chief Executive Paul Otellini announced an exhaustive review of the company’s unprofitable divisions in April, rumors began swirling about scorched-earth job cuts to reverse sinking profits.
But the restructuring plan unveiled Tuesday by the world’s largest chip maker including the elimination of 10,500 jobs, or about 10 percent of Intel’s work force failed to please investors.
Intel shares fell 68 cents, or 3.4 percent, to close at $19.31 Wednesday on the Nasdaq Stock Market.
Chip industry experts say the bruising was fueled by increased skepticism and a lack of clarity about Intel’s strategy to boost profits and win back market share from smaller rival Advanced Micro Devices Inc.
“People don’t think it’s enough,” said Nathan Brookwood, an analyst with the research firm Insight 64. “They were expecting bigger cutbacks and other changes in terms of writing off some inventories that could be a problem for the company over the next quarter or two, and none of those were addressed. It’s a good start, but I don’t know if this is going to be enough to solve Intel’s problems.”
The move was the largest streamlining maneuver yet by Otellini, who became chief executive in May 2005 and oversees a company whose head count had swollen to more than 100,000 workers around the world.
He inherited a thorny challenge: The near-monopoly Intel had enjoyed in its core business making the chips that function as the brains of computers was dissolving under pressure from AMD.
Many of AMD’s advances came during the tenure of former Intel CEO Craig Barrett, when the company was criticized for being too slow to react to the 2003 launch of AMD’s critically acclaimed Opteron and Athlon 64 chips for servers and desktop PCs.
AMD slowly began gaining market share, and over the past year has taken about 5 percent of Intel’s share of the combined market for server and PC chips, according to Mercury Research.
Intel still holds a commanding lead with about 72.9 percent of that market. But Eric Ross, an analyst with ThinkEquity Partners, said the company is expected to continue losing ground.
“Paul Otellini has been dealt a bad hand, and whether he’s a good CEO or not, we’ll be able to tell that in five years,” Ross said. “They fell behind AMD in a big way, and that’s why they’re having problems.”
Analysts were reluctant to blame any executive specifically for Intel’s problems, noting that the company led for many years by management icon Andy Grove has endured large but strategic cuts before.
In the mid-1980s, Intel eliminated about 7,000 jobs as it exited a business it helped create making dynamic random access memory chips widely used to store information in computers to focus on microprocessors.
The company famously avoided layoffs after that. But the dot-com crash did prompt the elimination of about 11,000 jobs largely through attrition and buyouts in less than two years. Head count was reduced to about 79,000 in 2002, then ballooned to about 103,000 this year.
In April, Otellini said the company was undertaking a comprehensive review of staffing levels and money-losing business groups across all of its operations.
Later in the summer, Intel announced the layoff of about 1,000 managers, and the elimination of about 2,000 jobs through the sale of two underperforming divisions.
Including those positions, a total of 5,000 jobs have already been eliminated or will be cut this year as part. Those are included in the 10,500 cuts announced this week.
But analysts predicted that as many as 5,000 more unannounced jobs cuts could come this year through the sale of underperforming business groups.
One possible target for sale or spinoff is the division that makes so-called NOR flash chips, a type of memory that stores information in cell phones.
Flash memory chips are invaluable in mobile devices because they retain data even after the device is turned off.
Intel has bet big on NOR flash technology, but analysts have criticized the unit’s disappointing returns as wireless companies have gravitated toward a cheaper but less effective type of memory known as NAND flash.
NAND is the type of memory used in the hottest consumer electronics from iPods to digital cameras and other portable gadgets.
Though vowing to stick by its NOR flash division, Intel itself signaled a shift toward NAND development with a partnership announced in November 2005 with Boise-based Micron Technology Inc. to produce the memory chips.
Dean McCarron, an analyst at Mercury Research, said Intel likely wanted to give investors concrete data about its restructuring before announcing any sale or spinoff plans.
“Intel’s preference is to give investors very tangible information they don’t want to be too aggressive,” he said. “The cuts are very focused and targeted in areas where they think they can withstand some reductions. This is kind of a stake in the ground in how they’re managing things.”
Analysts said they were pleased by the higher-than-expected savings the job cuts were expected to generate about $3 billion annually by 2008. But many expressed disappointment about the lack of clarity on a larger strategy.
“People are looking for a clearer description of the direction the company’s headed how they are going to compete in the future, the focus on the bottom line,” said Doug Freedman, an analyst with American Technology Research.
