September 6, 2006 – Confirming months of speculation, Intel has announced plans for a sweeping restructuring following an analysis of the company’s structure and efficiency, citing plans to shave $3 billion off of annual costs and operating expenses over the next two years.
The plan calls for $2 billion in savings in 2007 (25% of that from costs, 75% from reducing operating expenses), with the total increasing to $3.0 billion in 2008 after a full-year run rate for the projects.
Intel said the reductions in 2007 will be more broad-based, involving improvements to manufacturing efficiencies, equipment utilization, product design methods and processes, and elimination of organizational redundancies. The company expects to achieve $1 billion in “capital expenditure avoidance” through utilizing manufacturing equipment and space.
Intel already has twice reduced 2006 projections for sales, profits, and capital spending. In July the company cut its targets for FY06 capital spending (including spending on IM Flash, the Intel-Micron flash JV) to $6.0-$6.4 billion, down 6% from a range of $6.4-$6.8 billion projected in April, and lowered R&D expenditures to approximately $6.0 billion, vs. $6.1 billion estimated in 1Q06. At the time, Intel execs indicated that half the $400 million cutback in capital spending would come from a slowdown in construction spending, with the rest coming from efficiency improvements to better use the capacity it already has — e.g., finding ways to increase loadings in its backend/test process equipment.
Included in the plan is a 10% workforce reduction (10,500 positions) — the company’s biggest cuts since 1985 when it exited the DRAM memory business, noted analysts — mainly from management, marketing, and IT functions. Nearly half of that total already has been achieved through attrition and previously announced actions — e.g., last month’s sale of Intel’s media and signaling business, the July sale of its communications and applications processor business, plus previous announcement of 1000 management-position layoffs. Severance costs are expected to total approximately $200 million.
Analyst Doug Freedman with American Technology Research noted that the $3 billion in cost savings was above expectations, but much of those savings appear to be from lower marketing expenses, which “we have questioned for their effectiveness,” he wrote in a research note. Further, there was no talk about possible actions to reduce or write down inventories, which would remove a major concern for investors. “Inventory risk persists, slowing the gross margin recovery,” he stated.
There was also no mention of Intel’s NOR flash business, which posted a $149 million operating loss in 2Q and $253 million for 1H06, and has long been the speculative target for a sale or spinoff. Freedman wrote that recent comments from STMicroelectronics “may indicate that a deal may be in the works,” which could reduce Intel’s workforce by an additional 5000.
In July, Intel said it was beginning to see efficiencies out of that division, after adding other flash-related manufacturing technology development work to that group, and that next year NOR revenues might be “meaningful” as a percent of overall sales, vs. the current 6.7% level.
Intel’s cutbacks could be a boon for Taiwanese contract manufacturers, particularly if the cutbacks extend to Intel’s 300mm fabs in the US and Israel, and test and packaging facilities in Malaysia, mainland China, and the Philippines, noted the Taiwan Economic News. Intel has yet to partner with Taiwan Semiconductor Manufacturing Co. (TSMC) with more leading-edge microprocessors, to date only contracting with the foundry giant for south-bridge chips and some wireless chips. Meanwhile, Advanced Semiconductor Engineering Inc. (ASE), which also works with Intel on south-bridge chips, already has a facility in Malaysia and has committed $200 million this year to expand output capacity for flip-chip substrates, the story noted. Other possible Taiwanese beneficiaries of Intel’s cost-cutting efforts include Siliconware Precision Industries Co. Ltd., Hon Hai Precision Industry Co., and Asustek Computer Inc.