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Turnaround Talk Lifts Intel

Alexei Oreskovic

Faced with slowing PC demand, eroded market share and an inventory glut, Intel's top brass outlined a comeback plan Thursday.

Speaking at the company's spring analyst day event in New York, Intel's executives detailed the company's recent travails, and vowed to turn things around by transforming the 100,000-employee company into a leaner, more agile operation.

"We are very well aware of the realities of our current and future business outlook," said CEO Paul Otellini. "We are taking actions to address those realities."

Besides the already announced cuts of more than $1 billion from 2006 spending, Otellini pointed to an internal review process designed to "restructure, resize and repurpose" the company, hinting that significant layoffs could be in the offing. Other cost cuts could embrace more than just the headcount.

"In my mind, it would be way too simplistic to simply do a reduction in force," he said.

Shareholders liked what they heard, bidding up the stock 47 cents, or 2.5%, to $19.96 on Thursday. Intel remains down 20% from the start of the year and is 31% off its 52-week high of $28.84, hit July 19.

Intel's 90-day review will examine everything from employee productivity to nonperforming businesses and capital efficiency, said Otellini.

The first actions resulting from this review process will occur as soon as they're fomulated, he said, while other actions could stretch into 2007.

Meanwhile, Intel executives said the company's market-share losses would bottom out in the current quarter, with gains returning this summer.

"We're poised for a second half rebound in [server] share," said Anand Chandrasekher, the general manager of sales and marketing.

With its stock trading near a 52-week low, Intel has struggled in recent months. Although the company supplies microprocessors to roughly 80% of the worldwide PC market, it has steadily lost market share to rival Advanced Micro Devices, whose current line of processors are considered superior to Intel's on a performance and power-efficiency basis.

Last week, Intel told the Street that it expected 2006 revenue to be down 3% year over year, compared with its initial projections of increasing sales between 6% and 9%.

The company blamed much of the shortfall on a glut of a couple million microprocessors that have accrued among Intel customers.

Chandrasekher detailed how Intel got itself into its current inventory hole, tracing the problem to the company's constraints in producing enough chipsets throughout 2005.

With chipsets scarce, customers started building up their inventories to ensure that they weren't caught short. These ordering patterns masked the slowdown in the PC market that began in the third quarter of 2005.

Intel executives said the company was now working with customers to ensure that the excess inventory is completely burned off in the current quarter, making room for a new lineup of microprocessors that Intel describes as its most competitive in years.

Beginning in June, Intel will release the new Woodcrest server processor, followed closely by new desktop and notebook chips that are based on a brand new microarchitecture that promises vastly enhanced performance and greater power savings.

In past cycles, a confluence of a new processor product with a new microarchitecture has led to Intel's biggest share gains, said Otellini.

"We will use those new products and that new technology to drive market share up, just like we did every time in the past," said Otellini.

Otellini also pointed to emerging markets and a new breed of ultra-portable PCs as new avenues of growth for the company.

While 83% of U.S. households have PCs, he said, PC penetration was an "abysmal" 2.8% in emerging markets. Intel plans to grow in those markets through initiatives like its recently announced multi-user community PC, as well as a special sub-$400 PCs sold through telephone service providers in countries like Mexico.

And with continuing improvements to power efficiency and form factor, Otellini said there was a market for a new generation of handheld gadgets that incorporate various radio chips and feature full-fledged, always-on Internet capabilities.