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Intel to cut 3,000 jobs
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April 14, 1998: 8:41 p.m. ET
Chip maker announces biggest job reduction plan in more than a decade
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NEW YORK (CNNfn) - Intel Corp., citing weaker demand for its computer chips, reported a 35 percent drop in first-quarter profits and announced the biggest workforce reduction in more than a decade.
Saying the company had gotten ahead of itself, Intel executives Tuesday said the computer bellwether would slash 3,000 jobs -- or five percent of worldwide workforce -- from its payroll over the next six months. Intel said most of the cuts would come from attrition rather than layoffs.
Industry analysts said Intel's actions reflect the changing environment for the semiconductor industry.
"Their earnings came in quite nicely above expectations," said Drew Peck, a technology analyst at Cowen & Co. "But the future is not a pretty picture. They know very well that it's because of the pricing environment in the computer industry. The pricing of their very product is falling through the floor."
Fewer orders from PC makers
Intel blamed the lower first-quarter results on weaker demand from several key computer makers and weakness in the Americas, Japan and Europe.
"This was a disappointing quarter. The PC industry seems to have gotten ahead of itself, building more product than end-customers purchased," said Intel Chairman and Chief Executive Officer Andrew Grove.
For the three months ended March 28, Intel earned $1.27 billion, or 72 cents a diluted share, on revenue of $6 billion. Excluding a one-time charge of 9 cents a share, earnings totaled 81 cents a share.
The operating results were slightly above analysts' expectations of 72 cents a share, according to First Call Research Network.
The quarterly results compare with net income of $1.98 billion, or $1.10 a diluted share, on revenue of $6.4 billion in the year-ago quarter.
The results were announced after the market closed. Intel (INTC) shares closed down 1/4 to 76, but climbed to 78-1/4 in after-hours trading.
Paul Otellini, executive vice president and general manager of Intel's architecture business group, characterized the first quarter as "disappointing" and attributed much of the decline to a slowdown in chip purchases by PC makers.
"Revenue from distributor sales was flat and [PC makers] purchased less from us in Q1. Average selling prices of microprocessors declined slightly although we believe we maintained market share in the first quarter," he said.
Challenges to continue
Otellini said the challenges of the first quarter will continue.
"We expect revenue to be down, although sequential revenue growth will resume in the second half," Otellini said.
"Flat to lower revenues in the second quarter combined with increased volume of purchased components will reduce margins a few points from the first-quarter's 54 percent. For the full year, we expect gross margins of 52 percent, plus or minus a few points," he said.
Intel continues to push adoption of its Pentium II processors with forthcoming 350 and 400-megahertz versions. Shipments of 233 and 266-megahertz versions designed for laptops have also begun. The company said shipments of Pentium II processors will exceed Pentium with MMX shipments for the first time this week.
Intel expects margins to increase as PC manufacturers begin to phase out Pentium machines and move to Pentium II designs. That will enable the chip giant to recoup more of the increased costs for Pentium II packaging. The company believes increased sales will offset higher packaging costs by the second quarter.
Intel has a three-month supply of materials to continue manufacturing the Pentium with MMX technology. When that supply is depleted, the company will focus solely on the Pentium II and Celeron, a new chip targeted for sub-$1,000 PCs, that will be introduced Wednesday.
New chip to drive Compaq's new PC's
Compaq Computer Corp. plans to introduce systems using Celeron in conjunction with Intel's launch. No pricing information was available.
Some analysts have worried that Celeron won't find wide adoption because of its different design, which lowers its cost by eliminating cache memory. Cache memory is used to hold tasks while they are waiting to be send to the processor for execution.
Andy Bryant, Intel's chief financial officer, acknowledged the chip maker didn't do a good job of bringing expenses in line with an anticipated drop in revenue.
"We recognize the company got ahead of itself in revenue expectations. One of the actions we will be taking to bring expenses under control will be to reduce headcount by 3,000, predominately through attrition. We will also cut capital spending from [the current] $5.3 billion to $5 billion through a combination of slowing capacity and delaying new office buildings," he said.
Despite the bad news, Bryant said Intel believes year-to-year growth will occur in the PC industry.
Analysts said Intel's pessimistic outlook and the layoffs are examples of the company coming to grips with the new realities of the computer industry. Low-cost chip offerings from such competitors as Advanced Micro Devices Inc. and Cyrix Corp. have forced Intel to enter the low-cost PC market, which has taken a toll on the company's margins.
Scott Nirenberski, director of equity research at Deutsche Morgan Grenfell, said that while the new chip will provide a boost to the company, it will take some time.
"Hopefully, in the second half of the year they'll be rid of inventory in the channels and the Asia economy will be stabilizing," he said. "That's when they'll start to see an uptake of the new product.
"Right now, they're trying to control expenses given the outlook in the business," Nirenberski added. "It's time for them to hunker down."
First major job cuts in microprocessor era
The sweeping job cuts are Intel's first since it was a manufacturer of dynamic random access memory chips, well before its name became synonymous with PCs.
"The industry has fundamentally changed," he said. "They have to streamline and downsize for the new market. The day of the $300 processor is over. We're in the age of the $100 processor, and they have to get used to it."
Mona Eraiba, semiconductor analyst at Gruntal & Co., believes Intel's second half will be better.
"We expect in the second half we will see increases in revenue as transitions to the Pentium II are complete," she said. 
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Intel Corp.
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