Intel's (INTC +1.78%) turnaround under CEO Pat Gelsinger has two core components: one, regain manufacturing leadership by investing heavily in new process nodes and facilities while building out a world-class foundry business, and two, dramatically slash costs.
Intel has taken a variety of steps to bring costs down:
- It has temporarily cut wages.
- It's working on separating its manufacturing arm into its own business unit, which has the potential to save billions in annual costs by eliminating bad incentives and inefficiencies.
- It's aggressively killed non-core businesses.
Intel has entirely exited the memory-chip business by selling off its NAND and SSD manufacturing operations and pulling the plug on its Optane memory unit. The company has also given up on Ethernet switching chips, exited the prebuilt server business, and scrapped its Blockscale bitcoin mining chip. None of these were core businesses.
NASDAQ: INTC
Key Data Points
The end of NUCs
Intel disclosed earlier this week that it was exiting yet another non-core business. The company will no longer make small form factor PCs. It began making and selling these systems, called Next Unit of Compute, or NUC, PCs in 2013.
NUCs are small yet powerful systems that have gained some popularity over the years, thanks to their tiny footprints. But the business of assembling PCs is a tough, low-margin affair, and the current PC demand environment is downright miserable. Global PC shipments dropped 13.4% year over year in the second quarter, according to IDC, marking the sixth consecutive quarter of declines.
Intel likely got into the PC business with its NUC products to jump-start a market for small form factor PCs. In that sense, the company has succeeded, even though the business is getting the axe
A wide range of other companies now sell small form factor PCs, many of them powered by Intel CPUs. This increase in competition, coupled with a tough PC market, likely means that Intel's NUC business is a money loser for the company.
While Intel will no longer make PC systems, designing and manufacturing PC CPUs remains a core business.
On its way to $10 billion in cost cuts
Intel is aiming to slash annual costs by between $8 billion and $10 billion by 2025. The biggest component of this plan is the reorganization of its manufacturing operations. The company has identified billions in potential savings that can be unlocked by creating the right incentives among its business units to avoid wasteful and inefficient use of its manufacturing facilities.
Exiting non-core businesses will be a significant component, as well. While it's not known how much money Intel was sinking into the NUC business each year, the company had reduced costs by $1.5 billion as of earlier this year by exiting businesses. That number is likely higher today.
These cost savings won't automatically fall through to the bottom line. Even as it cuts costs, Intel is investing heavily in growth initiatives.
The company is on track to launch five new manufacturing nodes in a four-year span, The Intel 18A node that's set to be ready by the end of 2024 will have the potential to propel Intel past TSMC in terms of manufacturing tech. The company is also building new facilities around the world, an expensive endeavor.
Ultimately, the NUC business was a distraction for Intel. It was never going to be a major revenue contributor, and the costs to keep the business up and running can be better used to fuel Intel's semiconductor manufacturing comeback.
