Intel to cut 5,000 jobs, warns on revenue

Summary:The chipmaker slashes its earnings forecast again and announces it will cut 5,000 jobs over the next nine months.

Intel slashed its earnings forecast again Thursday and announced it would cut 5,000 jobs--about 6 percent of its work force--over the next nine months.

The chipmaker warned it now expects revenue for its fiscal first quarter to be around $6.5 billion, approximately 25 percent below fourth-quarter revenue of $8.7 billion. That would make it Intel's slowest quarter since late 1997.

The world's largest chipmaker had said in January that it expected a revenue drop of 15 percent in the first quarter.

The accelerated decline in revenue is attributable to a drop-off in sales of server chips, flash memory and networking chips. Earlier, the weakness came from slow PC sales, mostly in North America. Now, sales in a number of the company's divisions are slow and the sluggishness has spread around the world.

"We are now seeing weakness in the computer industry and the communications industry in all markets," said Sean Maloney, worldwide director of sales and marketing for Intel. Although a seasonal recovery in the second half is possible, "Demand isn't quite where we'd like it to be," Maloney said. "We're not in a position right now to see whether there will be an uptick."

Intel also said it expects its gross margin to be 51 percent, compared with its previous forecast of 58 percent.

The company said it expected to achieve most of the job cuts through attrition. The company has about 86,000 employees.

"There is no demand out there. There is massive inventory and demand has completely collapsed," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray. He estimated Intel will experience a 20-percent decline in processor shipments this quarter over last quarter and a 3- to 5-percent decline in average selling price.

Because of overall economic factors, a recovery for the tech industry later this year is unlikely, Kumar said.

"A recovery in the second half is a pipe dream," he said. "The question is second half of what year." Kumar added that Intel's decline cannot be attributed to gains by rival Advanced Micro Devices. AMD largely participates in the consumer market and issued its own forecast for flat earnings in January.

Maloney said Intel has not lost market share in desktop PCs. "Our market share and our average selling prices on desktops don't appear to have moved very much at all," he said. "What has happened is that with the drop in server demand, our blended average selling price has declined."

On Feb. 20, several weeks after it had made its first earnings warning during the quarter, Intel warned it would cut its work force. At the time, however, the company did not put a number on the figure.

The company also shaved research and development to $4.2 billion from $4.3 billion and reiterated that capital spending would remain at $7.5 billion for the year. Analysts earlier in the year predicted the company would slash both budgets.

Intel CEO Craig Barrett, however, asserted a week ago that both budgets would stay intact. "The slowdowns are going to end, and you need to prepare for the upswing," he said. In many ways, capital spending is a must this year. The company is planning to start making chips out of copper--rather than aluminum--wires by the third quarter and will start to process chips out of larger 300-millimeter wafers soon after. Both changes necessitate new equipment.

The last time Intel faced belt-tightening was in 1998. An unsold surplus of PCs from late 1997 and early 1998 drastically dampened sales for a number of companies, including Compaq Computer, Hewlett-Packard and Intel.

At the time, the chipmaker cut 3,000 positions from a total of 65,000. The company had hoped to accomplish the reductions through attrition but eventually offered voluntary severance packages to encourage employees to leave. It also imposed a nine-day, unpaid furlough on plant workers in Oregon.

Although the situation in 1998 is similar in some ways to the current slowdown, differences exist.

Computer penetration was far lower back then. By the middle of 1998, PC sales rebounded and eventually exceeded analyst expectations. In addition, 1999 proved to be a stellar year for sales, with unit sales growing 23 percent.

Last year, by contrast, the worldwide market grew by 14.5 percent, with U.S. sales slowing to a crawl. Analysts have predicted that the maturing market has hit a plateau, eliminating the type of boomerang-like rebound seen in 1998.

Another difference: Technology companies are a lot bigger than they used to be.

At the end of 2000, Intel had 86,100 employees, 36 percent more than when it cut jobs in 1998. Dell Computer, which announced layoffs last month, has more than doubled in size since 1998. Intel slashed its earnings forecast again Thursday and announced it would cut 5,000 jobs--about 6 percent of its work force--over the next nine months.

The chipmaker warned it now expects revenue for its fiscal first quarter to be around $6.5 billion, approximately 25 percent below fourth-quarter revenue of $8.7 billion. That would make it Intel's slowest quarter since late 1997.

The world's largest chipmaker had said in January that it expected a revenue drop of 15 percent in the first quarter.

The accelerated decline in revenue is attributable to a drop-off in sales of server chips, flash memory and networking chips. Earlier, the weakness came from slow PC sales, mostly in North America. Now, sales in a number of the company's divisions are slow and the sluggishness has spread around the world.

"We are now seeing weakness in the computer industry and the communications industry in all markets," said Sean Maloney, worldwide director of sales and marketing for Intel. Although a seasonal recovery in the second half is possible, "Demand isn't quite where we'd like it to be," Maloney said. "We're not in a position right now to see whether there will be an uptick."

Intel also said it expects its gross margin to be 51 percent, compared with its previous forecast of 58 percent.

The company said it expected to achieve most of the job cuts through attrition. The company has about 86,000 employees.

"There is no demand out there. There is massive inventory and demand has completely collapsed," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray. He estimated Intel will experience a 20-percent decline in processor shipments this quarter over last quarter and a 3- to 5-percent decline in average selling price.

Because of overall economic factors, a recovery for the tech industry later this year is unlikely, Kumar said.

"A recovery in the second half is a pipe dream," he said. "The question is second half of what year." Kumar added that Intel's decline cannot be attributed to gains by rival Advanced Micro Devices. AMD largely participates in the consumer market and issued its own forecast for flat earnings in January.

Maloney said Intel has not lost market share in desktop PCs. "Our market share and our average selling prices on desktops don't appear to have moved very much at all," he said. "What has happened is that with the drop in server demand, our blended average selling price has declined."

On Feb. 20, several weeks after it had made its first earnings warning during the quarter, Intel warned it would cut its work force. At the time, however, the company did not put a number on the figure.

The company also shaved research and development to $4.2 billion from $4.3 billion and reiterated that capital spending would remain at $7.5 billion for the year. Analysts earlier in the year predicted the company would slash both budgets.

Intel CEO Craig Barrett, however, asserted a week ago that both budgets would stay intact. "The slowdowns are going to end, and you need to prepare for the upswing," he said. In many ways, capital spending is a must this year. The company is planning to start making chips out of copper--rather than aluminum--wires by the third quarter and will start to process chips out of larger 300-millimeter wafers soon after. Both changes necessitate new equipment.

The last time Intel faced belt-tightening was in 1998. An unsold surplus of PCs from late 1997 and early 1998 drastically dampened sales for a number of companies, including Compaq Computer, Hewlett-Packard and Intel.

At the time, the chipmaker cut 3,000 positions from a total of 65,000. The company had hoped to accomplish the reductions through attrition but eventually offered voluntary severance packages to encourage employees to leave. It also imposed a nine-day, unpaid furlough on plant workers in Oregon.

Although the situation in 1998 is similar in some ways to the current slowdown, differences exist.

Computer penetration was far lower back then. By the middle of 1998, PC sales rebounded and eventually exceeded analyst expectations. In addition, 1999 proved to be a stellar year for sales, with unit sales growing 23 percent.

Last year, by contrast, the worldwide market grew by 14.5 percent, with U.S. sales slowing to a crawl. Analysts have predicted that the maturing market has hit a plateau, eliminating the type of boomerang-like rebound seen in 1998.

Another difference: Technology companies are a lot bigger than they used to be.

At the end of 2000, Intel had 86,100 employees, 36 percent more than when it cut jobs in 1998. Dell Computer, which announced layoffs last month, has more than doubled in size since 1998.

Topics: Intel, Hardware, IT Employment, PCs, Servers

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