By Michal Lev-Ram
November 19, 2012

FORTUNE — Intel CEO Paul Otellini led the chipmaker to record sales — a whopping $54 billion in its last fiscal year. He also drove the “ultrabooks” movement in an effort to reignite demand for PCs and spearheaded breakthrough innovations like 3-D Tri-gate transistors. His track record on mobile, though, is questionable.

The outgoing CEO will retire in May of next year, Intel (INTC) said in a release issued Monday morning. The move came as a surprise because Otellini is 62, still a few years away from the company’s mandatory retirement age of 65. A company spokesperson insisted that it was Otellini’s decision to leave, saying the board accepted his resignation “with regret.”

“I’ve been privileged to lead one of the world’s greatest companies,” Otellini said in a statement. “After almost four decades with the company and eight years as CEO, it’s time to move on and transfer Intel’s helm to a new generation of leadership. I look forward to working with Andy [Bryant, chairman of Intel’s board], the board and the management team during the six-month transition period, and to being available as an advisor to management after retiring as CEO.”

Even if the departure is amicable, Otellini is leaving Intel at a rough period of transition. While the world’s largest chipmaker still rules the PC industry, it has stumbled in the smartphone and tablet markets and could soon face competition in the server space from rival ARM-based chips. Otellini is well aware of the challenges ahead for Intel.

“Our comfort zone for so many years was Intel chips and Microsoft software and we knew what we had to do,” Otellini said in an interview with Fortune last January. “We built our chips to a certain specification and Microsoft did their software and we worked together and, voila, new PCs would come out from 100 vendors a year and everything would just kind of work together. It’s different in the phone space.”

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Even Intel’s relationship with Microsoft (MSFT) has changed — the Windows 8 maker is launching two versions of its Surface tablet, and only one of them is powered by Intel; the other by rival ARM chips. Meanwhile, the most popular tablet, Apple’s (AAPL) iPad, doesn’t use an Intel chip.

The company has made some headway in mobile, hitching itself to Google’s (GOOG) Android operating system and scoring a handful of deals with the likes of Lenovo and Motorola. But, at least so far, Intel-powered devices are no where near mainstream. And while the recent progress has happened under Otellini’s watch, the long-time Intel exec is also responsible for some questionable decisions in mobile, like selling off a former product line called XScale back in 2006.

When Otellini took over as CEO in 2005, Intel was also facing significant challenges, including antitrust lawsuits and massive layoffs. But the company’s traditional business is changing so drastically that whoever the board picks as its new CEO could step into an even more difficult role: Steering Intel through declining PC growth, staving off competition in the server market, and continuing its march into smartphones and tablets.

Intel has already implied three insiders are likely candidates for the job — Renee James, head of its software business; Brian Krzanich, chief operating officer and head of worldwide manufacturing; and Stacy Smith, chief financial officer and director of corporate strategy (one person who’s definitely not in the running is Sean Maloney, who also recently announced his retirement). As for Otellini, he will soon get to watch Intel’s outcome in mobile from the sidelines.

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