Background: Why is Intel cutting jobs?

Intel chief executive Brian Krzanich is eliminating 12,000 jobs - the chipmaker’s deepest cutbacks in a decade - taking his most radical step yet to move Intel into new businesses and ease its dependence on the shrinking personal computer market.

The world’s biggest semiconductor company said it’s shifting focus to higher-growth areas, such as chips for data centre machines and Internet-connected devices, which so far aren’t contributing enough to make up for the decline in PCs.

Intel posted disappointing first-quarter revenue and gave a second-quarter sales forecast that fell short of analysts’ estimates.

As PC shipments head for their fifth straight annual decline, Intel is finding it harder to offset that slump by leaning on booming demand for server chips and gains against weaker rival Advanced Micro Devices.

Intel employs some 4,500 people at its European headquarter in Leixlip, where it has invested heavily in chip production. It has given no specific information on how various sites will be affected by the cuts.

After bringing in new executives and shaking up his management team, Krzanich’s 11 per cent workforce reduction underscores his effort to decouple Intel’s future from the PC market and accelerate a push into new markets, such as chips for automotive, industrial and retail applications.”

It’s acknowledging the reality that it’s a single-digit growth world,” said Michael Shinnick, a fund manager at Wasatch Advisors, which owns Intel shares. “The end markets aren’t growing to the extent that they were.”

In the first quarter, net income rose 2.7 per cent to $2.05 billion, or 42 cents a share, while sales climbed 7.2 per cent to $13.7 billion, Santa Clara, California-based Intel said.

On average, analysts had projected earnings of 37 cents and revenue of $13.8 billion. Second-quarter revenue will be about $13.5 billion, the company said in a statement. That compares with an average analyst estimate of $14.2 billion, according to data compiled by Bloomberg.

The job cuts announced Tuesday will be Intel’s biggest layoffs since it reduced staffing between 2005 and 2009, when the company was responding to the global financial crisis and competition that wiped out growth.

Krzanich is taking his company’s headcount down from close to record levels after posting an average of less than 1 per cent revenue growth over the past four years.

“With 107,000 employees, there’s always room to tighten the belt, especially with a softer global macro,” said Craig Ellis, an analyst at B Riley and Co.

Intel's workforce has been above 105,000 since 2012, when it completed a surge up from an almost 10-year low of 79,800 in 2009, according to data compiled by Bloomberg.

That period of growth includes its two largest acquisitions, McAfee in 2011 and Altera last year.

For the year, Intel now expects total revenue growth to be at a percentage in the mid-single-digit range compared with 2015. The company reduced its forecast because the PC market is declining more than it anticipated and will shrink in the high-single-digit per cent range, Smith said Tuesday on a conference call.

Intel’s Krzanich said Smith’s new role will give him the opportunity to gain more experience in the operations of the company, as he’ll be overseeing more than 50 per cent of the workforce.

The company isn’t simply cutting costs with the headcount reduction, Krzanich said. It’s trying to free up resources, even in PC chips, to concentrate on areas that will provide future growth.

Global PC shipments dropped 9.6 per cent in the first three months of the year, the sixth consecutive quarterly decline, according to market researcher IDC. The drop took unit sales to their lowest level since 2007.

Intel’s client computing group, which makes and sells PC chips, had first-quarter sales of $7.5 billion, a decline of 14 per cent from the preceding three months, but a gain of 2 per cent from the year-earlier period. That unit accounted for 55 per cent of total revenue.

The data-centre division posted sales of $4 billion, up 9 per cent from a year earlier - falling short of Intel’s target of double-digit percentage growth in that unit.

After investing in its mobile-chip business for more than 15 years, Intel still has little revenue and few customers in the market for smartphone and tablets. In 2014, the last year Intel broke out results for the mobile division, that unit posted an operating loss of $4.2 billion. Those results are now included in the PC-chip unit.

Krzanich has been putting more pressure on those who report to him as he tries to rekindle growth and make his products relevant in new markets.

Bloomberg