Navigating Intel’s Management Transition

Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a surprise move, Intel (NASDAQ: INTC) CEO Paul Otellini announced that he will be retiring in May next year. Paul Otellini has been Intel’s CEO since May 2005 and has been with the company since 1974. Under Otellini, Intel earned record revenue and net income. While Intel completely missed the mobile device (i.e. smartphones and tablets) revolution, from 2005 to 2011 revenue and EPS increased from $38.8 billion to $54 billion and from $1.40 to $2.39, respectively. Also, under Otellini Intel reached the 22nm node and developed Tri-Gate/FinFET transistors.

Going forward, Intel has a lot of options. In the press release announcing Otellini’s resignation, Intel also announced the promotion of Renée James, Brian Krzanich, and Stacy Smith to the position of executive vice president. Along with Sean Maloney, David Perlmutter, and Arvind Sodhani, these managers are the leading candidates from inside Intel. The following table shows their current position and the year they started at Intel.

Manager Position Year Started at Intel
Renée James General Manager of Software and Services Group 1988
Brian Krzanich COO 1982
Sean Maloney Chairman of Intel China 1982
David Perlmutter General Manager of Intel Architecture Group and Chief Product Officer 1980
Stacy Smith CFO and Director of Corporate Strategy 1988
Arvind Sodhani President of Intel Capital 1981

As shown, Intel has many experienced executives. When it comes to a successful company like Intel, it is always a good idea to promote from within the company. The managers have extensive experience and know the company extremely well.

Due to this transition, uncertainty has naturally crept into Intel’s future. Legendary investor Warren Buffet has some good insights on the topic of management. In his 1985 letter to shareholders, Warren Buffett states,

“My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad).”

While Buffett was referring to Berkshire’s textile business, this message also applies to Intel’s situation. Intel will still be a strong company when Otellini leaves. The CEO is important, but for a behemoth company like Intel the overwhelming majority of its strengths and weaknesses lie within the rest of the company.

Current Situation

Looking at advantages, Intel has its own foundries and has a huge lead in processing technology. Currently, Intel is at the 22nm node and Tri-Gate transistors. In comparison, Taiwan Semiconductor Manufacturing is at the 28nm node and planar transistors. This advantage in processing technology will play a big role in Intel’s war against ARM Holdings (NASDAQ: ARMH). Currently, ARM controls 95% of the smartphone market. ARM licenses its architecture and, as a result, Intel has many ARM competitors such as Nvidia, Qualcomm, and Samsung. Apple (NASDAQ: AAPL) uses the ARM architecture in its iPad and iPhone devices. In addition, ARM recently released 64 bit designs, which AMD plans on using in its battle against Intel in servers. However, Intel has made great progress in power management and has launched smartphones running on Google (NASDAQ: GOOG) Android. Intel is inside the Orange San Diego, Motorola Droid RAZR i, and other smartphones.

On the PC side, Intel is still dominant. The PC market continues to be Intel’s money machine. In Q3 2012, 64% of Intel’s net revenue came from its PC Client Group. While global PC shipments declined by 8.6% in Q3, about 88 million PCs were shipped during the quarter. The PC is not going away and has a long-term growth trend.

Furthermore, Microsoft (NASDAQ: MSFT) recently launched Windows 8, which presents an interesting opportunity for the Wintel duo. Windows 8 is tablet friendly, which means Intel, Microsoft, and other PC giants have invaded the tablet market, a market that is currently dominated by the iPad and Android tablets. An assortment of Windows 8 tablets, Ultrabooks, and hybrids have already launched.

Windows 8 also presents an opportunity for ARM. Microsoft released Windows RT, which is a version of Windows 8 designed to run on ARM processors. Also, Microsoft sells the Surface Windows RT, which uses Windows RT. However, regular Windows 8 is compatible with legacy Windows programs, but Windows RT is not. In addition, Apple has responded to rising competition by launching the iPad mini and the 4th generation iPad. In total, Apple has five distinct generations of the iPad. The war is heating up, and the holiday quarter should present a clearer picture of where the tablet market is headed.

Summary

Intel CEO Paul Otellini is retiring next year. Looking forward, the company has a deep roster of internal executives to choose from. While Otellini has been a good CEO and the transition brings some uncertainty to Intel’s future, the company’s current strengths and challenges should be the main focus of investors.

Currently, the computing world is in the middle of the mobile device revolution. In this war, Intel has a big advantage with its foundries, and it could be the deciding factor in its battle against ARM. In addition, the tablet market has turned into a battle ground between Wintel, Android, and iOS. Overall, as long as Intel promotes from within, it should be business as usual going forward.


iamgreatness owns shares of Microsoft and Intel. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, ARM Holdings, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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