It’s drastically bad in there right now… and the choice to do this rather than cut dividends?
Intel is cutting costs tremendously at the expense of their employees. These cuts are broad-based, with employees having their compensation affected. Quarterly pay bonuses are gone, annual bonuses are being paused, 401k match is halved from 5% to 2.5%, merit-based raises are suspended, and there is a pay cut to all employees’ base salary based on grade.
All employees below Principal Engineer, grades 7 to 11, will get a 5% cut, 10% cuts will be instituted for VPs, and the executive leadership team will take a 15% cut, with Pat Gelsinger taking a 25% cut. These cuts hurt even more when we are in an inflationary environment. These cost cuts are, of course, dwarfed by their quarterly dividend, of course, which we have been clamoring for them to cut for over a year.
Intel’s leadership has decided that the dividend is more important than employee retention, which is bad news for the long-term future of the company.
We are sorry to all employees of Intel about this and hope they can make it through this tough time. Other firms are still hiring despite the macroeconomic conditions, although at a slower pace than before. This was an incredibly dumb move, as employees will become “quiet quitters” and lose morale. Bonus cuts are 1 thing, but base pay cuts sting. Intel, unfortunately, has to cut costs dramatically due to its immense amount of cash being burned, but they are doing it in the worst way.
High performers likely start to “phone it in” while they look for their next job, as there is no incentive to keep working long nights and early mornings. The level 7 cut-off point is too low. This includes some fresh advanced graduates and many normal graduates with a handful of years of experience.
In October, we discussed the comprehensive supply chain review that Intel was instituting to cut costs. Since then, Intel has cut an R&D center in Israel, started laying off thousands, cut their RISC-V accelerator program, ended development of networking switches, delayed construction on the Germany Fab, slowed Ohio fab tool orders, and cut capital expenditures by billions.
Intel announced a layoff last year, however the Q4 earnings release stated headcount is still at 130k employees. I do suspect this move will help reduce headcount, in addition to any layoffs. Of course with a move like this they are more likely to lose desirable talent than the less productive. They did announce that it does not impact any of the hourly workers. I would like to see headcount closer to 100k when they announce Q1 earnings.
As an interesting aside, they hired the micron CFO, Zinsner, last year. Micron has been known as a very austere company while Intel was a high cost producer. It is clear Intel is working on becoming more efficient in order to compete in the foundry business.
There are multiple forces in play here. Can Intel afford to pay by far the best compensation when the company is losing money and a legitimate argument can be made that those employees have been underperforming for five years? I think not. It’s unfair to employees who worked their butts off only to see bad CEO decisions hurt the bottom line. But given the number of layoffs at other tech companies, I doubt many of these Intel employees will find significantly better compensation by leaving.
AT&T cut their dividend and their stable stock price dropped by about 40%. Intel needs a robust stock price to issue new stock to pay for all their investments in a time when they are spending lots of money to catch AMD. Is it better to add billions of debt or to cut compensation to prop up the stock price? The market generally responds well to companies cutting costs, and the price increase after the news was digested shows the market is not quite as horrified by the bad profit forecast since Intel is taking steps to reduce costs. Quarterly bonuses? Annual bonuses? In 40+ years of making software, I received five bonuses (and far more than five raises and promotions).
I have had friends and students go work at Intel, and they all felt they were compensated well if not above their actual value.
A lot of bad decisions led to where Intel is today, and not reviewing their compensation packages seems to me to have been one of them.
I think for now Intel has enough cash/funding for their expansion plans without doing another debt or stock offering.
They have $28B in cash on the balance sheet, another $15B they are getting from Brookfield for the new AZ fabs, and somewhere between $10B and $15B from the chips act.
That puts them somewhere over $50B to fund the current fab expansion.
In 2022, capex was around $25B, while depreciation $10B. That means capital expansion is around $15B/year. The $50B should take them through 2025 capital expansion plans.
As an aside, back in the day the depreciation was around 3 years. At the last earnings call they mentioned for 2023 they are extending depreciation from 5 years to 8 years. With the slowing of Moore’s law and the move to foundry Intel will have a much longer life cycle for their capital.
I have to backtrack here, as Intel just did a $11B bond offering. Interest rate at slightly more than 5%, so not great compared to existing bond offerings. Some of this will replace existing debt that will retire.
I think this move speaks to a grab for more time in a last ditch effort to get the IDM 2.0 strategy completed.
If the IDM 2.0 strategy does not take off Intel will be in massive trouble. If IDM 2.0 fails could Intel become another Xerox or Kodak? Or would it sell off some fabs/divisions and just dwindle to another small fab company?
Back in the day, the Intel compensation strategy was highly based on performance. The goal was the best in the industry when things are going well, and below industry average when not so well. I suspect that strategy is still in place, but perhaps also the same at other high tech companies these days. I think the GAAP rule change that forced the switch from stock options to RSU’s flattened this a bit.
It also used to be that because of the name, Intel could recruit people at below industry average pay (I had higher offers, but accepted the INTC one). I doubt that is the case anymore.