Intel Corporation (INTC) is changing before our very eyes. The chipmaker, whose PC-heavy business model came to define it in the 1990s and early 2000s, is being forced to pivot into new, more growth-y areas — specifically data centers and the Internet of Things.
That’s great news for INTC stock owners, who frankly need to see the $150 billion chip giant move quickly to keep up with and stay ahead of current tech trends. That can be hard for a company of Intel’s size to do, but it’s necessary.
For it to move quickly, Intel has decided to lay off 12,000 workers — a whopping 11% of its global workforce.
This wasn’t just another quarter.
INTC: It’s Time to Restructure
GAAP revenue clocked in at $13.7 billion, up 7% year-over-year, and that translated into $2 billion in profits for Q1, or 42 cents per share. Excluding one-time charges, earnings were $2.6 billion, or 54 cents per share, up 20% from a year ago. Analysts were looking for EPS of 48 cents, so that was a plus. Adjusted revenues of $13.8 billion were in line with the consensus mark.
Not so hot for INTC stock was management’s forecast: The top brass guided for revenue of $13.5 billion (plus or minus $500 million) in Q2, easily below the $14.16 billion analysts had been expecting. On top of that, Intel will also take a $1.2 billion restructuring charge related to the 12,000 jobs it cut. That’s $100,000 a head.
In after-hours trading yesterday, Intel stock fell as much as 3% after the earnings release. Shares have since recovered and have actually bounced to a 1% gain as investors weigh tepid guidance against the longer-term savings enabled by massive job cuts.
The 12,000-position gash in INTC’s workforce will take full effect by mid-2017, and most employees should be made aware of their situations at some time within the next 60 days. Cost savings from the cuts should amount to $750 million in savings this year and $1.4 billion annually by mid-2017, the company said.
As for the restructuring, Intel seems to be honing in on where technology is heading. To that end, the initiative will “accelerate its evolution from a PC company to one that powers the cloud and billions of smart, connected computing devices.”
An INTC press release outlined where the company’s focus stands officially going forward:
“The data center and Internet of Things (IoT) businesses are Intel’s primary growth engines, with memory and field programmable gate arrays (FPGAs) accelerating these opportunities — fueling a virtuous cycle of growth for the company. “
In my Intel earnings preview on Monday, I predicted that the looming INTC layoffs (they were rumored even then) foreshadowed miserable first-quarter results. That wasn’t quite true: Q1 wasn’t bad, it was Q2 that was the stinker.
I reiterated, however, that INTC shares remained a long-term value, especially given the company’s sub-13 forward price-to-earnings ratio and juicy 3.3% dividend. I still think that’s true. Sure, diversifying away from PCs won’t be easy, but Intel already has been doing that for several years now, and the fact that it can grow revenues by 7% even while the PC market is contracting shouldn’t be taken lightly.
Now, it’s time for Intel to keep executing on these higher-growth areas.
Will INTC one day be known colloquially as an “Internet of Things” stock? The IoT segment made up just about 5% of its total revenue last quarter, so let’s not count our chickens just yet. But the 22% growth rate it saw in Q1 was the highest among any segment, so it’s not a bad place to start.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
