Rest of '98 key for Intel

Most analysts believe PC demand will pick up, but the company may not be able to avoid more layoffs.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
The first half is over, and it hasn't been pretty.

Slowing demand, lower prices, and increased competition over an ever-increasing array of products have prompted a number of analysts to reduce their earnings estimates for Intel in recent weeks. The company is expected to report earnings of approximately 62 to 65 cents a share on slightly lower revenues when it delivers its financial results on July 14, down from earlier predictions of 69 cents a share.

Intel prices:
Headed downward
Processor Current price October*
400-MHz Xeon $2,836 Data
450-MHz Pentium II $669** $562
400-MHz Pentium II $675 $375
350-MHz Pentium II $485 $213
Source: Technology
Business Research
* Prices are estimates
** Debut price in September
Most analysts believe demand will pick up in the second half, but challenges remain. Price cuts scheduled for July, September, and October will reduce chip prices by more than half of current levels--new versions of Xeon processors that haven't even been released are already being adjusted downward.

The cuts will keep Intel's factories humming at capacity, but at the expense of margin dollars.

"There is a well-defined pickup in the second half. The question is how does that translate into dollar sales," said Jeff Matthews, a partner in Ram Partners, a Greenwich, Connecticut-based investment firm. "The sub-$1,000 market isn't going to go away."

A stumble in computer sales could even prompt Intel to shrink its head count beyond a previously announced reduction of 3,000 employees.

"Everybody is waiting with bated breath for the second half," said one analyst.

An Intel spokesman stated that the company could not comment on financial issues because of a quiet period. Other sources at the company, however, said that they had not heard of additional restructuring.

Intel is an investor in CNET: The Computer Network.

Speculation owes to Intel's growing imbalance between revenues and head count. Intel stumbles The company's sales declined from $6.4 billion in the first quarter of 1997 to $6 billion in the first quarter of 1998, while the number of permanent employees went from 52,000 to 65,000. In other words, revenues fell while the company added employees.

Intel announced at the end of the first quarter that it would reduce the number of permanent employees to 62,000 by September. While a start, the readjusted head count would still leave Intel will more employees than it did for most of last year. Second-quarter revenues, meanwhile, are expected to decline slightly from last year's figure of $6 billion.

"Intel has made a lot of head count growth in the past few years," noted Mark Edelstone, semiconductor analyst with Morgan Stanley.

If demand picks up, the situation could cure itself. If demand doesn't pick up, however, Intel may have to resort to further cuts.

"We expect them to rationalize their expenses in the slower-growth period," said Ashok Kumar, semiconductor analyst with Piper Jaffray.

One early sign of stress at Intel was the desktop processor price cuts earlier this month. Historically, Intel has cut its prices at the beginning of the quarter. This is the first time a cut has occurred in the last month of the year, Kumar said.

Long-term factors, however, militate against a cutback, said Linley Gwennap, editor-in-chief of The Microprocessor Report. The company is currently trying to establish a foothold in the enterprise computing arena with Xeon and at the same time win back ground in the sub-$1,000 market with Celeron chips.

"I don't think that they are managing head count on a quarter-to-quarter basis. Staffing is certainly a part of their expenses, but they need to look at what their revenue goals are long-term," said Gwennap. "The PC industry would have to go to hell in a handbasket [for Intel to make major reductions in employees]," he added.

Also, Intel's market fallout the company already has adjusted to a lower-margin future. Various Intel executives have said that the company's gross margins will stabilize at around 50 percent, down from the 60 percent margins of previous years.

Nearly all analysts state that stronger demand is going to be essential for the rest of the year to mitigate other factors.

Edelstone did not comment on the need for additional layoffs, but noted that Intel's own price cutting strategy puts pressure on the company. Price cuts will occur in July, September, and October. By the fourth quarter, a 350-MHz Pentium II computer will probably only cost between $1,200 and $1,500.

Nimal Vallipuram, an analyst with Bear, Stearns, discounted the necessity of any additional layoffs. "When the PC market turns up these things fall by the wayside," he said. Instead, the issue for Intel remains product flow.

"The big question right now is whether the inventory for PCs has come down," he said. "Demand has not been spectacular." He predicted 65 cents a share for the second quarter.