Intel CEO Otellini Promises Big Changes, $1 Billion in Cuts

Published: May 2, 2006

by Timothy Prickett Morgan

Chip maker Intel hosted its spring conference with industry and Wall Street analysts late last week, and the company's top brass said that 2006 is looking to be a tough year for Intel. Which is why Intel president and chief executive officer, Paul Otellini, announced that the company would be looking for ways to cut $1 billion out of operating expenses and $300 million out of capital equipment investments to bring its business back to more solid profitability.

"We are positioning ourselves for our most comprehensive, largest, and most competitive product rollout in years," Otellini boasted, referring to the laptop, desktop, and server variants of the Core architecture chips that Intel previewed earlier this year at Intel Developer Forum. But, he then went over some financials that showed Intel is facing some tough issues, and considering that these much-improved products are built into Intel's models, it is hard to see how this cannot be read as Intel gearing up for a price and technology war with AMD.

Last year was the best one in history for Intel, with $38.8 billion in sales and a $12.1 billion operating profit. But Intel is projecting PC sales will only be up in the single digits this year, compared to 12 to 13 percent in prior years, and when you add in competitive pressures from AMD and several million CPUs at Intel's server and PC partners that started building up in inventories last September, 2006 looks to be a bit rough. In fact, Intel is forecasting sales to be down 3 percent to $37.7 billion this year, and for operating profits to be down 23 percent to $9.3 billion. And that is after Intel takes out the $1 billion in operating expenses. Otellini said that Intel's partners had expected the fourth quarter of 2005 to be better than it turned out to be.

"We see a much tighter 2006 from a marketing perspective than we saw a few months ago," explained Otellini to the analysts. And he said that Intel was doing a top to bottom review of its entire business, not unlike the one that Intel did in the mid-1980s that lead the company to ditch the memory business and devote itself to the CPU business. "Every part of Intel will be part of this," he said. "You will see a leaner, more efficient, more agile Intel at the end of this process." Otellini said that the review would take about 90 days, but because it needs to cut expenses now, it will make cuts as it becomes obvious where they need to be made.