Intel Corp. became the latest victim of a slowing U.S. economy Thursday, when the company announced it would drastically reduce its workforce and slashed revenue expectations for its first fiscal quarter.
The chip behemoth will cut 5,000 jobs over the next nine months as part of an effort to offset lagging revenues, the company said in a statement issued Thursday. The Santa Clara, Calif., chip maker employs close to 87,000 people worldwide.
Intel now expects revenue to be down 25 per cent from the immediate prior quarter, when revenue was US$8.7 billion. Intel had previously indicated that first-quarter revenue would be down 15 per cent from the prior quarter.
Research and development expenditure will be cut by 15 per cent from the prior quarter’s total of $2.4 billion, the company said.
Intel cited slower than expected demand for microprocessors used in servers as the main reason for the revisions; however, the vendor said demand for networking, communications and PC processors also slowed.
The company’s server chip business was particularly hard hit, with several telecommunications firms canceling orders during the quarter, Andy Bryant, Intel’s chief financial officer, said in a conference call with press and analysts Thursday afternoon. The failure of many dot com startups over the past year is also taking its toll, causing a cutback in spending among service providers.
“If desktop processors were our only problem we would be close to forecasts,” he said. “What’s driving our problem is that it is spreading into the server space as well.”
The decision to cut R&D spending contrasts sharply with the message delivered just last month by Intel President and CEO Craig Barrett at the Intel Developer Forum in San Jose, Calif. At that time, Barrett urged that the IT industry can’t save its way out of a recession, and said Intel would boost its R&D budget to $4.3 billion over the next year.
“This is what I think every one of us has to do,” Barrett told his industry peers at the time. “Never save your way out of a recession.”
The Intel chief also said that Intel’s broad portfolio of products would help it ride out the economic roller coaster. Intel executives reiterated that message during Thursday’s conference call, but acknowledged that demand currently is weak across the board.
“We see weakened demand for nearly all Intel products,” Bryant said.
As well as in its core microprocessor business, demand was also slow for Intel’s networking and flash memory products, Bryant said. In addition, the company found itself saddled with higher than normal inventory levels and higher start-up costs for new factories, he said.
“We’ve had a pretty disappointing first quarter,” he said. “We expected a pick-up but haven’t seen it. Some days you come in and see two positive signs and then you see three negative signs the next day. I can’t look at the economy and give you a lot of hope.”
While the United States caused the most drastic problems, Asia and Europe contributed substantially to the grim financial outlook as well.
“If you look at European PC growth rates over the last six to nine months, they have been slower than the U.S. and Asian markets,” said Sean Maloney, Intel executive vice-president and director of sales and marketing. “The business sales in Europe have been uninspiring now for about three quarters.”
Intel hopes Europe will steer clear of any knock-on effects caused by the waning U.S. economy, he said. The company expects to receive telling data in the next few weeks on hardware sales from Germany, the United Kingdom, France and Scandinavia, which should help Intel to hone its outlook.
In Asia, the Taiwanese, Korean, and Japanese markets tell a similarly uninspiring tale. Intel cited China and India as the only bright spots in recent weeks, calling sales in the two regions “robust.”
Despite the uncertainty, Intel’s CFO sought to paint an upbeat picture for the future.
“While the current climate is grim it has done nothing to shake our confidence in the years ahead,” Bryant said.
Intel remains pleased with sales of its Pentium 4 desktop processors, demand for which has not slowed, Maloney said.
Intel is due to report its first-quarter financial results on April 17.
In laying off workers, the company has met the same fate as some of the technology industry’s other large players. Other companies to announce layoffs in recent weeks include Nortel Networks Corp., Dell Computer Corp., and Toshiba Corp.
Shares of Intel (INTC) rose almost one per cent on Thursday’s trading, to US$33.25. The job cuts and revised forecast were announced after the U.S. financial markets closed. In after-hours trading, Intel’s stock had moved 6.93 per cent lower at the time of this report.
Intel, based in Santa Clara, Calif., can be reached at http://www.intel.com/.
