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Intel’s Transformation to Chip Supplier of the Future

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Intel undergoing a major business transformation

For the past year, Intel (INTC), the chip inside every PC, has been undergoing a business transition away from PCs toward data center, IoT (Internet of Things), and memory. The company exited the mobile processor market, acquired McAfee and then spun it off, and announced major layoffs. Intel also acquired Altera and several startups to accelerate its entry into the AI (artificial intelligence) and IoT markets.

Intel’s CEO, Brian Krzanich, is seeking to transform the company from a no-growth PC-dependent company to a profit-making company that is at the center of the connected world.

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Intel’s focus areas

As part of the transformation, chip giant Intel (INTC) is a undergoing major restructuring that could bring in annual savings of $1 billion. The company is also refocusing its portfolio in high-growth areas within the data center, IoT, and memory markets.

In its Data Center segment, Intel is slowly shifting from enterprise to the cloud, high-performance computing, and deep learning. In the IoT space, it is focusing more on industrial, virtual reality, automotive, and drones than on wearables.

Intel’s transformation strategy

This time, Intel’s strategy is different. Instead of building technology from scratch, Intel is striking new partnerships with Google (GOOG), BMW, and Mobileye (MBLY). The company is also making acquisitions and implementing management changes in an effort to become the chip supplier of the future.

The company’s transition required aligning its sales, manufacturing, and operations under one umbrella. Intel promoted its chief financial officer, Stacy Smith, to executive vice president with responsibility for sales, manufacturing, and operations. The company also appointed eBay’s (EBAY) Bob Swan as the new CFO.

Impact of transformation on Intel’s earnings

Intel (INTC) expects this portfolio transformation and business restructuring to result in a 1% reduction of its spending as a percentage of revenue in fiscal 2016, as well as another 1% by fiscal 2017. 

Meanwhile, Intel is enjoying its holiday season sales. In fiscal 3Q16, the company reported better-than-expected earnings, driven by strong PC sales and high ASPs (average selling prices). Intel broke new records in 3Q16 as it reported record-high quarterly revenues, driven by soaring revenues in its Data Center and IoT segments. 

In this series, we’ll look at Intel’s financial performance and how its restructuring and transformation strategy could impact its near-term earnings.

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