Speculation Grows as Intel's Restructuring Continues
 
* Highlighted in several recent press reports, speculation is growing as to
  what Intel's (INTC, Buy, $18.23) strategic review will mean for its many
  struggling divisions outside of microprocessors. Some reports are expecting
  an announcement as early as June 15, although we believe that date may be a
  little early, as Intel announced at its Spring Analyst Day on April 27 that
  the review would take approximately 90 days to complete. However, with the
  start date unknown, more information on Intel's plans should be available
  shortly.
* Specific speculation is that a reduction in force of approximately 16,000, or
  16%, will be announced as well as the efforts to find buyers for several of
  the firm's money-losing divisions.
* Targeted division are likely to include the firm's Xscale processor group,
  which has made some significant inroads into high-end PDAs and Smartphones,
  but has had little success in breaching the mainstream handset market,
  dominated by Texas Instruments and Qualcomm. In our view, if Intel decides to
  exit the wireless application processor market, its efforts to become a
  handset baseband supplier will cease as well. While Intel has had moderate
  Xscale success, its position as a baseband supplier has been disappointing.
* IXP network and communications processors are also likely to be on the
  chopping block, as Intel has also had little success at competing with the
  more complete solutions from companies such as Broadcom and Marvell, as well
  as many of the specialty communications companies, such as PMC-Sierra or
  Applied Micro Circuits.
* Of course, Intel's NOR Flash participation is an area of perennial
  speculation. With AMD exiting NOR Flash, we have argued the company has
  little reason to maintain this losing operation, although finding a buyer may
  be difficult. NAND Flash players find NOR to be a slower growth and less
  attractive market; a sale to Spansion is highly unlikely and the only other
  major NOR Flash vendor, STMicroelectronics, has also been looking at a
  possible exit. Therefore, Intel's only remaining options may be a partnership
  joint venture of some type, or an attempt to unload the division to the
  market.
* Regardless of the specifics, we believe the Street will view almost any move
  by Intel as a step in the right direction. We believe head count reduction
  and division cuts will go a long way toward the firm goal of cutting at least
  $1 billion in operating expenses, which would be a significant contributor to
  improved earnings leverage. At this point, and at this valuation, we believe
  investors need to see Intel becoming more aggressive and more proactive at
  reestablishing its position in the industry. If Intel's can begin to do so,
  we believe its shares will respond positively, all else being equal.
 
Source: Stifel, Nicolaus & Co. research