Tech Industry

Layoffs in Intel earnings wake

The chip giant reports earnings of $1.3 billion or 72 cents a share, a significant decline from last quarter and the year-ago period.

Intel (INTC) reported revenues of $6 billion and earnings of $1.3 billion or 72 cents a share, a significant decline in profitability from last quarter and the year-ago period.

The chip giant also announced that close to 3,000 employees will be laid off largely through attrition from its workforce of some 65,000 over the next six months due to lower-than-expected demand for computer chips. This is the first employee cutback for the company since the mid-1980s when it made a strategic shift away from memory and into microprocessors.

In morning trading following the earnings announcement, Intel shares were up 1-3/8, at 77-3/8.

Although yesterday's results reflect the growing malaise in the PC sector Intel at a glance and generally were expected by the analyst community, the staff cuts were unforeseen by industry watchers. Intel, more used to cutting chip prices than its job rolls, may indicate the degree to which overproduction, weakening demand, and continual price pressures are beginning to sap earnings from many high-tech leaders.

"This was a disappointing quarter," said Andrew Grove, chairman of Intel. "The PC industry seems to have gotten ahead of itself, building more product than customers purchase.

"We will, however, not let this diminish our conviction that our business provides the foundation of the new technological world."

First-quarter revenue came to $6 billion, down 7 percent from first-quarter 1997 revenue and 8 percent from last quarter's revenue.

Earnings came to $1.3 billion or 72 cents a share, Intel stumbles down 36 percent from $2.0 billion or $1.10 per share for the same quarter a year ago, and down 27 percent from earnings of $1.7 billion or 98 cents a share the quarter before. The earnings figure, however, includes a charge of 9 cents a share for the acquisition of Chips and Technologies.

Margins for the quarter came to 54 percent, a figure analysts expect to continue to drop.

Additionally, the company said it expects to reduce head count by approximately 3,000 people over the next six months.

Intel said capital spending for this year is expected to be about $5 billion, down from a previous budget of $5.3 billion. Spending on research and development is expected to be about $2.8 billion this year from an earlier target of $3 billion. However, this year's spending figures represent an increase from the previous year in both cases.

While the quarterly report was both disappointing and expected, it is Intel's future that has most analysts concerned. The company's lower profit and margin outlook has raised concerns.

Earlier, Intel said that revenue would be 10 percent lower than the previous quarter. Revenue actually came in 7.8 percent lower.

"I think they are likely to talk about margin pressure continuing throughout the year, as opposed to just hitting its maximum inflection point in Q2," said Dan Niles, semiconductor analyst with BancAmerica Robertson Stephens.

"The stock is not a 'buy' at all," added Ashok Kumar, semiconductor analyst at Piper Jaffray. "The gross margins are down to 53 percent in the first quarter. For Q2, units are flat sequentially, and gross margins will be flat sequentially. We see 70 cents earnings per share for Q2."

"You are going to see gross margin erosion and that will continue for the foreseeable future," he added. "It will stabilize at 51 percent."

The questions surrounding Intel's future earnings largely derive from the changes taking place in the computing world. First consumers and now corporate buyers are demanding that computers cost less than $1,000, and even less than $800. The drop in computer prices in turn has prompted Intel to develop lower-cost desktop processors and to continue cutting prices for processors destined for higher-end machines. On average, Intel processors come to market at prices substantially lower than they did even a year ago, and those lower prices generally translate into lower margins and profits.

The company also is facing increasing competition from Advanced Micro Devices (AMD) and Cyrix in the sub-$1,000 area. On top of that, demand for PCs is likely to slow this year, according to International Data Corporation.

To counter the drop in desktop processor profits, Intel plans to more strongly emphasize processors for mobile computers, Intel's market fallout workstations, and servers, many observers have said. The first "Slot 2" processors, which will be aimed at servers and workstations, will come out during the second half of the year, and, according to a number of sources, likely will sell in the $2,000 range and higher--a substantial boost over the $583 that Intel charges for the 333-MHz Pentium II, their current top-of-the-line chip.

But Charles Boucher, semiconductor analyst with Donaldson, Lufkin, and Jenrette, said that move won't be enough.

"These markets are very small compared to the desktop processor market," he noted. "The profitability is continuing to fall in desktop processors, and that's a problem."

Nonetheless, Boucher, Niles, and others did not seem to think that Intel's current situation signals a crisis. Niles, in fact, pointed out that the company's stock is selling for more than it did last year, despite its warning that first-quarter sales would be 10 percent below earlier expectations.

Intel said that revenue for the second quarter would remain flat or dip, but then would recover during the second half of the year.

(Intel is an investor in CNET: The Computer Network).