Big changes are afoot at the world's No. 1 chipmaker. With its market share and revenue under siege, Intel (INTC) - Get Intel Corporation Report is on a mission to trim excess fat and regain its competitive form.
CEO Paul Otellini will have no shortage of candidates to cut as he embarks on what is expected to be the company's most radical reorganization in two decades: In addition to making the microprocessors that power three out of every four personal computers, Intel makes chips in products from cell phones to DVD players to telecommunications gear.
According to recent reports, Intel has quietly put some of its communications and mobile-applications processor businesses up for sale. Recent organizational changes in the flash memory division, which had a $154 million operating loss in 2005, have prompted speculation that Intel is readying the business for a spinoff.
Many of Intel's tangential chip businesses are believed to be subsidized by the flagship microprocessor business.
But they are also considered important assets in a technology universe where the center of gravity is increasingly drifting away from the PC, leaving Intel in a difficult position as it strives to ensure its future competitiveness.
Intel is facing two problems, says semiconductor analyst Nathan Brookwood of Insight 64. "No. 1, these businesses haven't caught on, so
Intel has to decide whether they want to continue to pursue them."
And if Intel does choose to shed some of its peripheral chip businesses, Brookwood says, what will the company do to restore its growth in a maturing PC market?
The company says it will likely provide an update on the restructuring process during the quarterly earnings report in July but declined to comment on "speculative" news reports about certain businesses being for sale.
"Everything is on the table," says spokesman Chuck Mulloy. "There are no preconceived outcomes of this effort."
A Memorable Year
Although Intel notched its highest sales ever last year at a whopping $38.8 billion, 2005 is unlikely to be remembered as a banner year.
Manufacturing missteps left Intel unable to supply enough of the chipsets that it sells alongside its microprocessors, and it watched as smaller rival
Advanced Micro Devices
grabbed the technology-leadership crown, thanks to AMD's energy-efficient, dual-core processors.
As a result, Intel's share of the worldwide PC microprocessor market fell from 81.6% in the first quarter of 2005 to 74.3% in the first quarter of 2006, says Mercury Research. Also, Intel is now aggressively slashing prices on its microprocessors to reduce inventory glut.
The reaction on the Street has been unequivocal. Intel stock, which closed at $17.79 Tuesday, is trading at its lowest level in more than three years.
But Intel hasn't been idle; it unveiled a significant brand redesign and is on the verge of
releasing a trio of new processors the company claims will recapture some of the lost market share.
The most anticipated development for many investors involves the internal changes Intel's management is expected to outline in coming weeks and months.
Atlantic Trust Stein Roe analyst Fred Weiss estimates that about 15% of Intel's revenue doesn't make any money. Detecting the hemorrhaging organs can be tricky, as Intel folds its disparate chip lines within larger operating segments. Weiss says Intel's 2003 annual report (when the company last reported financial results under a different format) provides an instructive reference.
Although Intel's PC microprocessor business earned $10 billion in operating income on $26 billion in revenue that year, the communications group lost $426 million on $2.1 billion in sales.
Not faring much better was the wireless communications and computing group with $432 million in operating loss on revenue of $1.8 billion, results that followed losses in 2002 and 2001.
In other words, Intel's core microprocessor business delivers operating margins as high as 39%, while its other two chip businesses carry negative double-digit margins. According to a recent report in the
San Jose Mercury News
, Intel has already begun shopping around portions of those businesses.
CIBC World Markets analyst Allan Mishan says Intel plays in the least-desirable section of the Wi-Fi chip market, as a notebook-chip supplier. By contrast, competitors, including
, sell higher-priced Wi-Fi chips for products such as routers and access point equipment.
Mishan, whose firm does not have any banking relationships with Intel, adds that Intel has less need to be in the Wi-Fi and ethernet chip businesses, because it "essentially entered the market to drive penetration into PCs and that mission has been accomplished."
Intel's mobile application processors business, however, which is also rumored to be on the auction block, appears less expendable.
To date, Intel's XScale application processors have not made much of a dent in the cell-phone market, where
rules the roost, although the business has achieved some measure of success in the handheld PDA market.
Research In Motion
announced that it would use an Intel XScale-based processor in the next-generation version of its popular BlackBerry device. With the tech market's shift toward PDAs for everything from gaming to communications, the XScale chips could prove to be a strategic asset.
Intel's Mulloy says that the benefits and tradeoffs of remaining in businesses such as XScale are precisely the questions the company is asking itself.
Flash memory, which plays a key role in new consumer electronic devices, provides a good example of some of the tradeoffs Intel is grappling with.
Last November, Intel
inked a joint venture with
to manufacture NAND flash memory chips.
Intel's main flash memory efforts prior to that deal, however, have focused on NOR flash, a technology that's growing at a far slower pace than NAND and one that has a track record of operating losses at Intel.
Although jettisoning the NOR flash business might seem a no-brainer, the CEO of Neuberger Berman Technology Management, Dan Niles, says the flash business needs to be viewed holistically.
"They use NOR flash like they use chipsets: to fill up older fabs," says Niles, whose firm has a position in Intel.
"The worst thing in the world is to have a fab with no products in it -- you've got all the expense and don't have any revenue."
Speaking to reporters in Malaysia last month, Otellini
maintained that Intel wasn't planning to get rid of the flash business.
Whether Intel ultimately opts to sell, spin off or merely scale back investments in various chip lines remains to be seen. But some investors say that focusing on pruning money-losing chip businesses doesn't address Intel's fundamental problem: its declining competitiveness in the PC microprocessor market.
With roughly 100,000 employees and multiple microprocessor design centers around the world, many analysts say there is plenty of redundancy at Intel. Additionally, the fact that AMD spent about 20% of what Intel did on R&D in 2005, to no apparent detriment, has not been lost on investors.
Intel has recently set an aggressive agenda of introducing a new chip microarchitecture every two years, which will require significant R&D resources; without the distraction of other chip businesses, Intel's microprocessor products could benefit from the extra attention.
"When you look at Intel's overall revenues and you see that 90% comes from these x86 processors and 115% of the profit comes from them," says Brookwood, "then you really want to make sure that that story is intact before you worry about how you're gong to diversify to protect yourself for the future."