Struggling to contend with dropping demand for personal computers, Intel Corp. said today it will lay off up to 12,000 workers, or 11 percent of its workforce, by the middle of next year.

The layoffs, some voluntary, were expected but larger than some observers had reckoned. They’re part of a drive by the world’s largest maker of silicon chips to move from its longtime focus on PCs to servers for massive data centers and cloud operations as well as mobile devices and sensor networks for the Internet of Things.

“It’s time to make this transition and push the company all over to the new strategic direction,” Intel Chief Executive Brian Krzanich (pictured) said in a conference call with analysts.

The layoff announcement came as Intel reported somewhat better-than-expected first-quarter earnings. The company earned a net profit before certain costs such as stock compensation of $2.6 billion, or 54 cents a share, on revenue of $13.8 billion.

That compares with Wall Street expectations of a 49-cent-per-share profit on a 7 percent rise in revenues to $13.73 billion–near the bottom of Intel’s own forecast of $13.5 billion to $14.5 billion. Intel had recently indicated profit could come in higher, so the Street’s “whisper number” was around 53 cents a share.

Intel’s shares, which fell a fraction of 1 percent today, were sliding about 2 percent in trading after the market close. The company lowered its forecast for this year slightly, saying revenue would grow in the mid-single-digits, not the mid- to high single-digits it had forecast. It said gross margin not including certain costs would be 62 percent, down a point from its previous forecast, despite a 3 percent expected drop in spending for research and development and marketing, general and administrative spending.

Primary growth engines

The company’s data center and Internet of Things (IoT) businesses are now Intel’s “primary growth engines,” Krzanich said. In an email to employees, he said the transition from PC chips “requires some difficult decisions” but promised Intel would “emerge as a more productive company with broader reach, and sharper execution.”

The newer operations grossed $2.2 billion in revenue growth last year, making up 40 percent of revenue and the majority of operating profit–largely offsetting the decline in the PC market segment, Krzanich noted.

Intel expects the layoffs, most of which will happen in the next 60 days, to save $750 million this year and $1.4 billion annually by mid-2017. The company will take a charge for the layoffs of $1.2 billion in the second quarter.

The skeptical reaction of investors was echoed by analysts, who peppered Krzanich on the earnings conference call with questions about the decline of the PC market and the potential for other markets such as data centers to make up for it. David Floyer, an analyst with Wikibon (owned by the same company as SiliconANGLE), said Intel is caught between a mobile rock and a hard place in the data center.

For one, Floyer said, Intel has been unable to unseat processors from ARM and Qualcomm in mobile devices because Intel chips generally still use more power. With the volumes ARM can generate, he said, “Intel is no longer the only one that can afford to build these expensive fabs [silicon wafer fabrication plants]. That’s a pretty existential risk” for a company that has dominated precisely because of its manufacturing prowess.

And while Intel currently dominates in chips used in data centers, others such as IBM’s Power chips and Nvidia graphics processor unit (GPU) chips are becoming more attractive for a variety of data center applications, such as artificial intelligence and networking. “They could lose the top end of the market, which is the most profitable,” Floyer said.

Shift to data centers

Still, Intel’s shifting of investment into growing areas such as data center products, including new silicon memory technologies, could pay off, said Patrick Moorhead, president of Moor Insights & Strategy. “Datacenter has been an absolute profit dollar driver and Intel’s big bet in differentiated 3D and XPoint memory just increases the size of the basket,” he said. “I’m really interested in the future to see if Intel announces anything on GPU compute technologies that have become a de facto standard in neural networks.”

Krzanich clearly hasn’t been any happier than investors with Intel’s struggle to make headway in mobile phones and data centers to make up for stagnant PC sales. On Apr. 5, the company announced several top management departures, which follow last November’s appointment of former Qualcomm executive Venkata “Murthy” Renduchintala, now president of Intel’s client computing and Internet of Things and systems architecture business units.

This is the first quarter Intel has broken out new operating groups, making the size, growth and profitability of each segment more apparent. In particular, it’s breaking out programmable chips, which include Altera, the programmable-chip maker it bought last year.

Intel’s Data Center Group posted revenue of $4 billion, up 9 percent from a year ago. Intel said it expects double-digit growth in that segment this year. “We’re very confident on our data center roadmap,” Krzanich said.

But the Internet of Things Group revenue, while much smaller at $651 million, led growth among all of Intel’s segments with a 22 percent jump.

Despite the decline in PCs, Krzanich said Intel will continue to invest in chips for fast-growing “client” devices such as notebook/tablet hybrids, thin and light devices, gaming machines and television set-top boxes, all of which use PC-related designs.

Photo from Intel