In my recent piece, "Intel's Time Is Running Out", I made the following remark,
If these companies continue to own the high growth mobile market, then Intel's share of the computing market will continue to diminish. From there, eventually its ability to invest in manufacturing leadership as well as in design will diminish. This ultimately leads to layoffs, capex cuts, R&D budget cuts and all of the usual things that come with the "death spiral."
Now, shortly after the article was submitted and subsequently published, Intel (NASDAQ:INTC) announced that it would be reducing its workforce by 5%. This isn't entirely unexpected, particularly given that both the CFO and CEO made remarks on the call that quite clearly indicated that some headcount reduction was coming. We now know the magnitude, but the real question is, "what's going on?"
108,000 Employees, Still Behind In Mobile
Take a look at the following graph,
Since 2010, Intel has just about doubled its research and development spending. Ths chart tells investors that the company's efforts in mobile finally became serious in 2010 and have been ramping pretty heavily since then. I also suspect that it was at this time that Intel decided to really push its R&D spending in a bid to try to extend its manufacturing technology lead over the rest of the industry (in both low power SoC products as well as high performance CPU products).
Now, while some may say, "hey, all that spending isn't really paying off" (and technically they'd be absolutely right), it's important to understand that the development cycle for mobile microprocessors/SoCs is roughly 4 years if you're starting from scratch. This means that the products hitting the market today were started back in 2009/2010.
That being said, it still seems weird to see companies with R&D budgets that look like this completely out-execute Intel's mammoth spending:
Is This A Death Spiral?
I don't think this is a "death spiral". Realistically, according to Intel, the company sees roughly 4% attrition each year anyway, so this really looks more like a hiring freeze than any sort of big "layoff". At this point, I think with ~100,000 employees, Intel has all of the human capital necessary to succeed in the end markets in which it plays.
Would it be nice if Intel were prospering and could continue to hire more people in place of those who leave? Of course, but right now, times are "tough" and until Intel can begin to grow revenue again, it really should be keeping opex flat to down. After all, Intel is already spending about as much as mobile leader Qualcomm (NASDAQ:QCOM) is on mobile chips, so it's not as though the company isn't spending at a rate commensurate with eventual parity with the market leader. It's all about efficient utilization of those resources now.
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.