Otellini Nicely Milked Intel’s PC-Chip Business, But is Pay Justified With Mobile Strategy a Flop?
With Intel (INTC) CEO Paul Otellini set to retire in May, one outcome remains undisputed: A failure in fulfilling the chip maker’s long-sought objective of gaining meaningful market share in mobile devices will not prevent the executive from leaving with a generous exit package – despite common stockholders still waiting for any meaningful gains of their own.
“Paul Otellini has been a very strong leader, only the fifth CEO in the company’s great 45-year history, and one who has managed the company through challenging times and market transitions,” said Andy Bryant, chairman of the board, in a company issued press release.
During Otellini’s tenure as CEO -- from the second quarter of 2005 through the third quarter of 2012 – there is no denying Intel achieved notable financial successes: cash generated from operations of $107 billion; annual revenue growth from $38.8 billion to $54 billion; and, cash dividend payments totaled $23.5 million.
Driving much of this success was Otellini’s iron-fisted insistence that Intel chip architecture focus on cost efficiency over performance. This strategic shift away from power-hungry chips to ones that balanced energy consumption with slightly slower clock speed helped the company dominate global microprocessor markets for desktop personal computers – and nearly bankrupted Advanced Micro Devices (AMD).
In 2011, Intel delivered sales of $54 billion, operating income of $17.5 billion, net income of $12.9 billion, and share-net of $2.39 -- all records. Of note, the company derived 66% and 19% of its revenues, respectively, from the PC/laptop markets and servers in data centers, mostly in emerging markets, according to regulatory filings.
Dividend payouts, operating margins, return on assets, return on equity -- as measured by these traditional profitability metrics, Otellini delivered the goods.
This “record” of performance gave the board the excuse it needed to shower Otellini with a compensation package that exceeded $17 million (salary of $1.1 million, cash bonus of $6.4 million, plus some $10 million in stock/option awards) in 2011, up from $15.6 million and $14.6 million in the prior two years, according to annual proxy statements filed with the SEC.
Digging deeper into the storied legacy of Paul Otellini, however, we find a man who might have been too myopic in transforming manufacturing – both in operations and cost – in his quest for profitable growth. According to Bernstein Research analyst Stacy Rasgon, "Intel’s phenomenal revenue growth over the last couple of years has been out-of-sync with many data points in PCs. Indeed, we find that most of Intel’s growth in PC revenues was not really due to outsized unit growth, but instead from significant upside to pricing.”
Could Intel’s glory days be behind it? The Santa Clara, CA-based semiconductor maker said third-quarter 2012 net income fell 14.3% to $3 billion, or 58 cents per share. Revenue dipped year-on-year five percent to $13.5 billion, which management attributed to a slowdown in global demand for PCs.
In fact, with Otellini’s distracted by the desktop and server markets, handset and tablet manufacturers -- from Qualcomm (QCOM) and Samsung to Apple (APPL) and Dell (DELL) – and other chip makers – from Texas Instruments (TXN) to Nvidia (NVDA) –switched en masse to a chip design with faster speeds and lower power consumption licensed from ARM Holdings (ARM), a British-based technology company.
Despite pouring almost 19% of each sales dollar into R&D, Intel shareholders are suffering as the company falls further behind in the faster growing mobile markets. For the nine-months ending September 29, deliveries to handset and tablet makers totaled an anemic 9% of revenues. And, the division posted a year-to-date operating loss of $882 million.
There is more bad news on the horizon too. The infamous “WinTel” monopoly is officially dead, as Microsoft (MSFT) is reportedly developing an ARM-based version of Windows 8, which would allow PC manufacturers the ability to offer users a notebook/tablet hybrid.
The 62-year old Paul Otellini certainly chose a good time for his egress. While Intel struggles to avoid being outflanked by all-things ARM, tech outsiders are also speculating that with Apple’s mobile devices devouring the PC market, the mobile tech titan could soon find Intel’s processing technology irrelevant – and cut all ties, bringing its chip development needs in-house, leaving Intel out in the cold.
“No man is rich enough to buy back his past.” ~ Oscar Wilde (1854 – 1900)
At Intel’s annual investor day last May, CEO Otellini promulgated that the company was dead serious: Intel would leverage its cutting-edge, fabrication technology and become a dominant player in the fast-growing mobile device sector. Come this May, however, the one development shareholders will know with certainty is that Otellini will exit the stage with a severance package worth $50.7 million -- $45.7 million if you exclude stock and option grants out-of-the money (exercise price greater than $21 a share)! With a retirement deal like that, why would Otellini even want to buy back his past?
David J. Phillips is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.