Intel Corp. today confirmed reports from earlier this week that it will cut a significant number from its massive global workforce, saying it plans to lay off about 15,000 workers, or 15% of its total.
The disclosure came on the back of a disappointing earnings report and lower guidance, and the company’s stock cratered after hours.
Intel said the layoffs are necessary to turn around its business and better compete with its more successful chipmaker rivals such as Nvidia Corp. and Advanced Micro Devices Inc. In a memorandum to staff, Intel Chief Executive Pat Gelsinger (pictured) said that the company wants to cut $10 billion from its annual cost base by 2025.
“Simply put, we must align our cost structure with our new operating model and fundamentally change the way we operate,” he said.
He also gave a brutal assessment of the realities of the company as it is now: “Our revenues have not grown as expected – and we’ve yet to fully benefit from powerful trends, like AI. Our costs are too high, our margins are too low,” he said.
The layoffs came on the back of disappointing quarterly financial results from the iconic chipmaker, which was founded back in 1968, before the personal computing revolution gathered pace.
Gelsinger said the company will unveil an “enhanced retirement plan” for eligible employees in the next week, as well as an application program for voluntary departures. At the end of fiscal 2023, Intel had 124,800 employees on its books, according to a regulatory filing.
“These decisions have challenged me to my core, and this is the hardest thing I’ve done in my career,” Gelsinger said. He added that most of the layoffs are expected to be made this year.
The chipmaker also said it is suspending its stock dividend as part of a broader effort to reduce its cost base.
Earnings and revenue miss
In its second quarter earnings report, Intel posted a small decline in revenue and offered a forecast for the current quarter that fell short of analysts’ expectations.
The company reported earnings, adjusted for one-time gains and costs, of 2 cents per share, well short of the 10 cents per share analyst target. Revenue fell 1% from a year earlier to $12.8 billion, below the expected $12.9 billion. All told, Intel delivered a net loss of $1.6 billion in the quarter, down from a profit of $1.5 billion a year earlier.
Looking to the third quarter, Intel said it’s expecting a loss of 3 cents per share at the midpoint of its range, while revenue will likely fall between $12.5 billion and $13.5 billion. Both numbers are well off the Street’s consensus estimates, with analysts targeting earnings of 31 cents per share on sales of $14.35 billion.
Some investors may have been bracing themselves for the worst, as Intel’s stock fell more than 5% in regular trading. When the news came out, the sell-off accelerated, and Intel’s stock plummeted more than 18% in extended trading.
Intel’s dramatic fall from grace
Intel has endured a dramatic fall from grace, having once enjoyed a status as the world’s undisputed leader in the chipmaking industry with a stranglehold on the personal computer market. However, the mobile computing wave that first emerged two decades ago caught the company totally off guard, and it has since been surpassed in market value by the likes of Qualcomm Inc. and Texas Instruments Inc., who lead the mobile chip industry.
In addition, Intel’s dominance of the PC market has been threatened by AMD, and it totally missed the artificial intelligence wave that set Nvidia Corp. on a path towards becoming one of the world’s most valuable publicly traded companies.
eMarketer analyst Jacob Bourne told the Associated Press that the layoffs may help to bolster Intel’s near-term financials, but he warned that this move alone will not be enough to recapture its dominant position in the chipmaking industry. “The company faces a critical juncture as it leverages U.S. investment in domestic manufacturing and the surging global demand for AI chips to establish itself in chip fabrication,” he said.
Gelsinger’s risky recovery plan
Besides the layoffs, Intel is also making a risky bet on transforming its entire business model. Under Gelsinger, it has set out to become a contract manufacturer for other, third-party chipmakers, such as Apple Inc., which designs its own chips but outsources the manufacturing process.
In the chip manufacturing business, Taiwan Semiconductor Manufacturing Co. is the world’s top dog, but Intel is betting that there’s room in the industry for another reliable manufacturing powerhouse. In particular, it believes the U.S. and other western governments will appreciate having an alternative to TSMC, which chiefly operates in its home nation of Taiwan and faces geopolitical threats from China.
The problem with Intel’s plan is that building out its chipmaking infrastructure is enormously expensive, and will likely end up costing tens of billions of dollars.
The company has been a major beneficiary of the U.S. government’s largesse, securing billions of dollars in grants via the 2022 CHIPS and Science Act, which the Biden administration pushed through Congress at a time when there was a global shortage of chips due to the COVID-19 pandemic.
In March, the U.S. government announced it would provide $8.5 billion in direct funding, and another $11 billion in loans to Intel, in order to fund the construction of new chipmaking plants in the country. At the time, Gelsinger hailed the CHIPS Act as the “most critical industrial policy legislation since World War II.”
Biden praised Intel as a job creator when it announced its plans to build a new chip fab in Columbus, Ohio, in September 2022. He said at the time that the $20 billion project would ultimately create 7,000 construction jobs and 3,000 full-time jobs once the plant is up and running.
Holger Mueller of Constellation Research Inc. said Intel’s ambitious rebuilding plan means it is under pressure to reduce costs where it can, and so lay-offs are an obvious course of action. “A lot of tech companies are reducing costs by replacing 50-year olds with 20-30 year olds, which can help to lower the costs of employees by between 40% and 60%,” Mueller said. “It’s not clear if that is what Intel is doing, but Pat Gelsinger is definitely feeling the pressure to keep a lid on the company’s cost base.”
Gelsinger said today that the job cuts will help to “sustain investments to build a resilient and sustainable semiconductor supply chain in the U.S. and around the world.”