I’m swinging back to pick up a bit of older chip news — I’ve been out of the loop at a wedding since the middle of last week — that could have wider ramifications for the PC industry through the end of the year. Intel is reportedly planning some significant layoffs in the coming weeks as it seeks to draw down expenses and trim overall costs. The company had initially planned for a 5% sales increase in 2015, but has since cut its forecast and now expects overall revenue to be flat in 2015 compared to the previous year.
These new layoffs would be in addition to the “voluntary separation” packages Intel reportedly offered to some of its R&D and manufacturing employees at the Fab D1X facility in mid-May. These offers appear unrelated to Intel’s decision to make a $16.7 billion bid for Altera. Intel has already announced that it will reduce R&D spending by $300M this year, so the cuts to headcount appear related to balancing the company’s books.
Why is Intel cutting R&D spending?
Let’s get one thing out of the way up front: Intel, by any measure, is a healthy company. The firm earned $55.9B in revenue in 2014, with a net income of $11.7B. Cutting its R&D spending by $300M and reducing headcount by some few hundred or even thousand jobs will not meaningfully impact its finances; a $300M reduction in R&D spending works out to 0.2% of Intel’s total net profit and an even tinier chunk of its net revenue.
Let’s assume that Intel’s forecast is accurate and total PC revenue is flat in 2015. That still puts the company on course to tie a record-breaking 2014. Its mobile earnings should be less of a drag this year, thanks to the slow ramp of SoFIA solutions and new low-cost strategies designed to reduce its reliance on contra-revenue shipments. Such practices aren’t expected to end this year, but Intel has previously stated that it expected to reduce its level of contra-revenue shipments throughout 2015 and hopefully hit break-even for the segment in 2016.
A $300M trim doesn’t necessarily mean that much when your total R&D spend is over $11B per year, but there’s one significant difference between the current situation and the older status quo. For years, Intel justified high R&D spending by pointing to its overall dominance of the semiconductor industry and its leadership on foundry and fabrication nodes. Now, that leadership position has begun to slip. While Chipzilla continues to lead in terms of per-unit profits and total foundry technology, the delays to its own 14nm rollout let Samsung close some of the gap between itself and Intel.
Cutting R&D at all, in other words, could lead to charges that Intel has misapplied or squandered its leadership position in semiconductors. I don’t personally think that’s what has happened here — while 14nm was undeniably late, Intel’s 14nm technology leads on multiple technical measures compared to TSMC or Samsung, and this should continue for the next few years. Intel would have to screw up several node transitions in a row for its foundry competitors to truly catch up, and while this could certainly happen, it hasn’t happened yet.
Cuts imply Intel expects modest gains from Skylake, Windows 10
The implications of both the R&D spending trim and the flat revenue guidance is that Intel doesn’t expect Skylake or Windows 10 to make much difference to its product sales. Once upon a time, OEMs and chip manufacturers alike expected Windows launches to drive new hardware, but Microsoft’s own policies may have weakened that trend. Giving Windows 10 away to every customer with a Windows 7 or 8 PC might make for great PR, but it could harm sales of new platforms if customers decide to upgrade the hardware they have. Combined with the fact that Windows’ minimum system requirements haven’t changed since Vista, and there’s tens of millions of laptop and desktop systems in market that can be upgraded rather than requiring new hardware. Unless you’re specifically in the market for a Windows system already, you’re more likely to just install it on a system you already have.
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Intel may be planning layoffs based on poor outlook for PC industry in 2015
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