Gelsinger Takes Ax To Intel After Chip Sales Slump, Profit Nosedives

Intel plans to lay off a "meaningful number" of employees and dump some products as part of a massive reduction in spending the chipmaker expects will reach up to $10 billion annually by 2025.

The American semiconductor giant said the spending cuts were necessary due to what CEO Pat Gelsinger said were "worsening economic conditions" that caused its PC and server processor revenues to plunge in the double digits in the third quarter of 2022. Profitability also nosedived.

To put some numbers on that: in the three months to October 1, revenue plummeted 20 percent year-over-year to $15.3 billion, which was in line with expectations. Net income crashed 85 percent to $1 billion. PC processor revenue was down 17 percent to $8.1 billion. Server silicon and AI tech came in at $4.2 billion, down 27 percent. Network and edge products managed $2.3 billion, up 14 percent. The chip foundry scored $171 million, slipping two percent. These figures were released Thursday by Intel.

Gelsinger said Intel plans to reduce costs by $3 billion annually starting next year, and that will grow to between $8 billion and $10 billion annually by 2025.

While Intel did not disclose how many job cuts it plans to make as part of the broader cost-cutting initiative, CFO David Zinsner told Barron's that it will be a "meaningful number." Bloomberg reported earlier this month that Intel was planning to make major layoffs, likely in the thousands. It was estimated that sales and marketing could lose up to 20 percent of staff.

Intel's layoff plans are partially reflected in a $664 million restructuring charge in the third quarter that the company, which employs more than 110,000 people, said is part of its "initial cost reduction actions."

"These are difficult decisions affecting our loyal Intel family," Gelsinger said during the quarter's earnings call with analysts, "but we need to balance increased investment in areas like leadership in [technology development], product, and capacity [at new plants under construction] in Ohio and Germany, with the efficiency measures elsewhere as we drive to have best in class structures."

The chipmaker is looking to save money in other ways. This includes "portfolio cuts, right-sizing our support organizations, more stringent cost controls in all aspects of our spending, and improved sales and marketing efficiency," Zinsner said on the call.

"Portfolio cuts" is one way of Intel saying that it plans to ax some products it makes and sells. Before and during Gelsinger's time as CEO, the company has been offloading or killing certain businesses. This includes the Optane memory business, which Intel ditched in July, and its drone entertainment unit, which the x86 giant recently sold to Elon Musk's brother. Just this week, Intel's Mobileye automotive business became a publicly traded company once again.

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Intel also expects to save money by decoupling its hardware and software design teams from its chip manufacturing business as part of Gelsinger's much-discussed IDM 2.0 strategy.

"We definitely view that there are efficiencies for us to gain as we go to this internal foundry model, where we see numerous areas in the company that we're not as rigorous as we need to be," Gelsinger said.

Despite these spending cuts, the CEO proclaimed that the "challenging business environment" may actually benefit his comeback plan, which seeks to thrust the chipmaker back into a leadership position for leading-edge semiconductor manufacturing by 2025.

"We remain fully committed to using the macro uncertainty to accelerate our efforts. Each quarter our confidence grows in achieving our goal of five nodes in four years," he said, without skipping a beat.

As several other chipmakers have recently made clear, Intel is not alone in facing an increasingly dire economy. But at the very least, investors finally seemed to buy Gelsinger's message and sent the company's stock price up more than five percent in after-hours trading. on-GAAP earnings per share of $0.59 beat Wall Street expectations by $0.26. ®