Intel – So what now?

Like many, we woke to the news yesterday that Intel’s CEO Pat Gelsinger is retiring. We have been writing a lot about this over the past year, so we were shocked but not surprised by the news. Intel has been in play since reporting its disastrous June quarter. Despite turning in a decent quarter last month, the writing has been on the wall for several months that Gelsinger was under pressure. That pressure was coming from all directions – customers, partners, employees and not least the Street. After the company reset guidance in July, the consensus across the financial community was that Intel had to be split in two, and increasingly that Gelsinger had to do.

So now our question for the community is what happens next?

Gelsinger’s strategy held that Intel could not split, and the Product side of the company needed to fund the Foundry side, first to get manufacturing back on track with Moore’s Law and then ultimately grow into a foundry. Even as a growing chorus on the Intel Board began calling for a split, Gelsinger stayed the course. Now that he is exiting, does the company have a new strategy? As of today, officially, it does not. In normal times, when Boards replace CEOs, they typically wait for the new CEO to come onboard to announce the new strategy. That is what happened when this Board hired Gelsinger three years ago. Moreover, there are some clues in the company’s press release announcing the departure. First, the company chose Michelle (MJ) Johnston Holthaus, the head of the Product side to be interim co-CEO. Second, in her quote in the press release she says:

As a board, we know first and foremost that we must put our product group at the center of all we do.

This reads like a strong endorsement of the company’s Product Group, putting Foundry and the fabs in the backseat. Our best guess is that the Board is now looking for a CEO who will put that strategy in place and very likely push to split the company in two.

But these are not normal times. The company is hemorrhaging share, margins and soon cash. Time is not on Intel’s side. Intel cannot spend a few months searching for a CEO, then give that CEO a few more months to come up with a strategy. As much as splitting the company in two makes sense on paper, the practicalities of it are immensely difficult, it will take years to conduct a ‘normal’ split, involving hundreds of millions of dollars in legal and consulting expenses. What will happen to the manufacturing process during that time? Will they continue to work towards 18A? That is reasonable enough as it is already ramping to volume, but 18A will not save the company. So what about 14A, which could save the company, but is at least a year (and probably two) from reaching viability? Do they continue to invest in that with a CEO focused on the Product side? A Product-centric approach will essentially wind the clock back to the strategy prior to Gelsinger, and so it is worth remembering this Board brought him on for a reason.

Another alternative is for the company to cease development of its own production processes and license TSMC’s. Again, this sounds appealing on paper, and we know many who advocate it. But this does not solve the problem either. Developing a new process is expensive, but those costs are tiny when compared to the capex required to bring up any process, Intel’s or TSMC’s – billions versus tens of billions.

Put simply, Gelsinger’s departure does not solve the company’s core problems – what to do with the fabs. To compete, the company has to find a few dozen billion dollars. They cannot cost-cut their way to those numbers. Many think the US government should fund this, but no one can say with any confidence that the US government will fund this.

We can (and have) come up with all kinds of ways that Intel can source the capital it needs to right its manufacturing process, but all of them are complex, requiring patience that no one seems to have.

Boiling it all down, Intel has a limited number of options left to it:

They can go back and focus on product and half prop up the manufacturing operations. Of course, this is what the company did before Gelsinger. It was not working then, and the company is in much worse shape now. Absent a clear strategic imperative behind the fabs, keeping the two sides together likely dooms them both.

They can split the company up, but that will take years, and so ends up looking just like the old strategy.

They can sell the company, but the only company capable of pulling that off is Broadcom. As we have said, Broadcom could inflict the kinds of cost-cutting and focus-inducing tactics needed to fix many of Intel’s problems. Maybe they are interested in a deal, or maybe they think buying software companies is much easier. We would like to think that Intel’s next CEO could adopt a Hock Tan-style reorganization of the company, but it is tough to see the Board signing onto such extreme measures.

Lastly, the company could just shut down the fabs. In fact, most of their alternatives likely end in this, it is just a question of how long it takes the company to realize it and how much value they burn before they do.

Photo Credit by Google Gemini