Intel warns of sinking profits, possible layoffs

Intel expects a 3% drop in revenue for 2006 and plans a reorganization that could include layoffs over the next 90 days, CEO Paul Otellini said Thursday.

Intel profits will drop from $12.1 billion in 2005 to $9.3 billion in 2006, Otellini predicted, speaking at the company’s Spring Analyst Meeting in New York. In response, Intel will cut spending this year by $1 billion, cut capital expenditures by $300 million and begin a 90-day structural reorganization of “nonperforming business units.”

“We are going to restructure, repurpose and resize Intel for the future,” Otellini said. He did not cite any numbers for potential layoffs of the company’s 100,000 employees, but he said the changes would come soon.

“It would be too simplistic to simply do a reduction in force. Our analysis will be completed within 90 days, but we will not wait that long to take action. This will be a full structural reorganization,” he said.

The disappointing financial numbers result from a slump in the growth rate of PC sales from 12% or 13% in recent years to 8% or 9% in 2006, excess inventory of microprocessors at retailers and a loss of market share.

Otellini did not mention names, but Advanced Micro Devices (AMD) gained market share in the first quarter of 2006, according to its earnings report.

Intel’s revenue forecast is a sharp change from strong growth in recent years, which included 13.5% annual increases from $30.1 billion in 2003 to $34.2 billion in 2004 and $38.8 billion in 2005. Intel will count net revenue in 2006 of $37.7 billion, Otellini said.

In profit terms, that will cause a sudden slump. Intel earned $7.5 billion in 2003, $10.1 billion in 2004, and $12.1 billion in 2005. Profit will fall to $9.3 billion in 2006, Otellini said.

In addition to the pending reorganization, Intel will try to regain market share by launching three dual-core, 65-nanometer processors in coming months.

“There has been a lot of anxiety over our market segment share. When you look at a slope of the graph, it’s not terribly pretty,” Otellini said.

So Intel will launch its Woodcrest chip for servers in June, its Conroe chip for desktops in July and its Merom chip for mobile PCs in August. Together, they will help recapture part of the lost business, but Intel lost market share in three segments of the market over the first quarter of 2006, said Anand Chandrasekher, the company’s senior vice president and general manager for sales and marketing.

Intel lost market share in channel and consumer retail areas for planning reasons; it did not build enough chipsets in the second half of 2005, he said.

Intel lost market share in servers for competitive reasons: “We did not meet the needs of the marketplace or our competitor had a better product than we did,” Chandrasekher said.