Intel’s visionary former leader Andy Grove died last month, but his strategic vision—”only the paranoid survive”—is alive and well under the direction of current CEO Brian Krzanich. Whether that will be enough to reinvigorate the company as the old personal computing business shrinks away faster than ever remains to be seen.
But the vitality of the paranoid approach was clear in Intel’s first quarter earnings report on Tuesday, when Krzanich opted for much bigger job cuts than anyone outside the company had expected, revealed a company-wide review of all product lines, and promoted his CFO to a broader role.
Some 12,000 Intel (INTC) workers will lose their jobs by mid-2017, half by the end of this year, ultimately saving $1.4 billion annually and shearing Intel’s ambitions in the area of traditional desktop and laptop processors. New president Murthy Renduchintala, an outsider hired in November from Qualcomm (QCOM) to shake things up, is conducting a review of all of Intel’s entire line of products, Krzanich revealed, adding that he expects to slash at least “a few” lines after hearing Renduchintala’s report.
And while Krzanich is only 55, he’s moving well-regarded CFO Stacy Smith to a new job heading sales, manufacturing, and operations to get “exposure” to more parts of the company—corporate speak for CEO successor planning. “Stacy and I have been working for several months, actually several quarters, on what does he do next, how do we grow both his exposure to other parts of the company, but also let the rest of the company see his leadership style,” Krzanich explained on the quarterly call with analysts.
Deeper job cuts, smaller product lines, early succession planning? In case anyone missed the overriding message, Krzanich delivered it point blank towards the end of his hour-long call: “We’re always paranoid,” he said.
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First quarter earnings came in about as Wall Street expected, with sales up 7% from last year to $13.7 billion and net income per share of 42 cents, up 1 cent from a year ago.
Still, sales growth was uneven in Krzanich’s high priority new business areas. The largest, making chips for cloud data centers, grew 9%, slightly better than a surprise drop to a 5% rate in the previous quarter but well below the 19% increase in the same period a year earlier. The somewhat smaller Internet of things business, which provides chips for self-driving cars and automated factory equipment, did much better by increasing 22%, more than triple the growth rate last quarter and double the rate of a year earlier. And there was no mention at all of Intel possibly winning some business from Apple to supply chips for upcoming iPhone models.
The greatest danger for Intel, like other old school tech giants trying to evolve rapidly, is that the company’s oldest and most profitable markets shrink faster than new markets develop. That’s what investors fear, as they’ve driven down Intel’s stock price 8% this year. Trading at only 12 times this year’s expected profits, Intel is valued by investors well below even old line businesses like Exxon Mobil and General Electric.
Krzanich can only do so much to fight that perception, especially in an environment where overall PC sales are falling at rate of more than 10% again this year. But he’s still trying.
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Asked if he was worried PC sales would shrink so far that the company wouldn’t be able to support investing in its high growth areas, especially with the planned layoffs and cost cutting, Krzanich rejected the idea.
“I’m not worried the PC will shrink to a point where the scale won’t get large enough to fund either the factories or the other innovations,” he said. “The restructuring actually makes us more profitable in the PC, thus allowing us to invest even more in those growth areas.”
Intel sees strong growth in some PC subsegments like convertible laptops that can change into tablets, more powerful gaming computers and television set top boxes. It plans to focus more on those, Krzanich added.
In the end, a few analysts wanted to know whether Intel could get back on track with Moore’s law, developing faster chips at the same cost by shrinking the size of circuitry every two years or less (Intel has struggled to get down from its current 14 nanometer chips to 10 nanometers). Krzanich couldn’t make any promises, admitting he was “not sure” how long the next transition, to 7 nanometers, would take.
“We’re constantly working to get back to two years,” he said.
Investors would love to see that. But until that happens, the doubters may remain in control.
