Intel is carving 11,000 jobs out of its global workforce as it struggles to reshape itself amidst the continuing decline of the PC market. The drastic cuts account for 12 percent of Intel's 107,000 employees, and the company hopes to complete the layoffs by the middle of 2017.
The cuts will come as a byproduct of a restructuring initiative that will incur a $1.2 billion charge in the second quarter. Intel projects the cuts will save $1.4 billion per year by mid-2017.
Intel announced the cuts during its quarterly financial disclosures, which actually reflected that the company did a good job of keeping expenses in line. Intel's sales weighed in at $13.7 billion, and though it was up 7.2 percent year-over-year, it was below a projected revenue of $13.8 billion. Intel also projected its revenue in the second quarter to reach $13.5 billion, which is below analyst estimates of ~$14 billion.
Intel, and the industry at large, eagerly awaited a Windows 10 refresh cycle that never materialized. To say the PC market is withering on the vine is an understatement; it declined by 10.6 percent in 2015 and added an additional 9.6 percent in the first quarter of 2016, thus reaching its lowest levels since 2007. Intel indicated that it expects the PC market to continue to decline in the "high single digits" for the remainder of the year.
Intel suffers at the whims of the PC market, which accounts for nearly half of the company's revenue. In the past, Intel offset the declining market by plundering AMD's market share, but Intel has largely picked the AMD carcass clean. Intel's client PC division scored $7.5 billion in sales in the first quarter, which is up 2 percent year-over-year but is a 14 percent decline compared to the prior quarter. A slight uptick in the CPU Average Selling Price (ASP) also helped Intel.
Intel was vague about the details of the restructuring but indicated that it is adjusting its sails to catch the incoming wind from the IoT and cloud markets while intensifying its datacenter focus.
The datacenter and cloud markets are low-hanging fruit for Intel. They already represent over 40 percent of the company's revenue and the majority of its operating profit. The company currently owns 99 percent of the datacenter CPU market but finds itself staving off a groundswell of competition from the likes of IBM and Qualcomm. The Data Center Group (DCG) grew 9 percent year-over-year (below projections of 15 percent).
The signs of a pending shakeup were present. Intel announced the abrupt departure of leading executives in its PC and IoT divisions earlier this month after it appointed the prominent ex-Qualcomm executive Venkata Renduchintala as the executive vice president, and president, of Intel's client products (PCs, smartphones, tablets and IoT). Intel does not have a commanding position in the burgeoning IoT segment, but it intends to experience more success there than it did with its mobile endeavors.
Intel is at near-record staffing levels, in part due to its Mcafee and Altera acquisitions. In contrast to the majority of the tech industry, Intel tends to preserve its workforce during times of change. It is common to encounter Intel employees with decades of tenure, so the cuts will be particularly painful.
"These are not changes I take lightly. We are saying goodbye to colleagues who have played an important role in Intel’s success. We are deeply committed to helping our employees through this transition and will do so with the utmost dignity and respect," wrote Intel CEO Brian Krzanich in a memo to employees.
Intel's stock remained somewhat steady after the announcement, which is in stark contrast to the 25 percent drubbing Seagate received with a similar announcement last week. Both companies rely heavily upon the client PC market, which is clearly in the midst of a secular decline. However, Intel projected the market trends better, thus controlling its expenses and still maintaining healthy margins. Intel is also more diversified (at least in terms of successful ventures) than Seagate and has a plan in place to transition to more profitable climes, whereas Seagate's plan is somewhat muddy.
Intel serves as the cornerstone of the PC market, and its adjustment raises the alarm that the declining PC market will likely never recover.
We know the breadth of the cuts, but not where Intel's ax will fell the most trees. The extent of the desktop segment cuts is not entirely clear, but it is likely to reduce marketing spend and other activities geared at engendering growth.
The impact to the enthusiast is unknown. Intel will likely continue to preserve most of its high-margin products in the client space, and we do know that it still maintains strong margins on enthusiast-class hardware. Just don't expect Intel to drop the price of Extreme Edition CPUs; it is clearly attempting to soak up margin where it can.
In either case, there will be a tremendous amount of uncertainty in the industry (in particular for the downstream PC companies) as we await more details of one of the largest transitions in Intel's history.