Intel reported Q2 earnings yesterday and the numbers were not good. Revenue of $12.8 billion missed consensus of $12.9 billion, but EPS of $0.02 was well below expectations of $0.10, and the guidance was even worse. They expect Q3 revenue of $12.5 billion to $13.5 billion, below consensus of $14.3 billion, and their expected loss per share of ($0.03) was less than consensus of $0.31. It is hard to grasp just how bad these numbers are, although the stock selling off 20% after hours does provide a succinct summary. Nor did the earnings call help. Putting it diplomatically, management’s commentary and responses to questions did not make matters any better.
Readers are likely not surprised by these numbers. A few months back we pointed out that this year is going to be very hard for Intel. The company’s future depends on them turning around their manufacturing process, but we will not see that reflected in numbers until late 2025 at the earliest. And until that happens Intel’s products are going to struggle to support the financials. The company claims it did not lose share this quarter in its main markets, but they instead cut prices rather sharply to hold onto that share. Add to that the transition to new manufacturing processes internally (which always have gross margin impact) and more products manufactured by TSMC and we get the margin implosion we are seeing now. (And maybe now is not the right time to mention that TSMC is raising prices…)
So none of these results are surprising, but what is surprising is the amount of uncertainty management injected into the process. Both their prepared remarks and answers reflect the gnawing cultural issues that we think have always been the heart of Intel’s woes. Our sense is that the biggest problem analysts encountered on the call was the degree to which the company would not concede that they have made mistakes somewhere along the line.
For instance, as a response to this quarter’s numbers, the company is implementing a massive reduction in operating expenses, including cutting 15% of their (already reduced) work force. They are also cutting their capex plans for the year. However, the company insisted that these cuts would not hurt their growth prospects. They repeatedly identified cost savings in their operations which they are now implementing. But they cannot have it both ways. Cutting costs today has to impact the timing of their manufacturing ramp and product launches. The company largely maintains this is not the case. Which then begs the question as to why they did not make these cuts earlier. Either the cuts impact their prospects or they should have made the cuts part of their turnaround plan a year ago.
Earlier this year, the company held an analyst event to unveil its Foundry unit, but it then took them three months to unveil the financials for that business. We interpreted this as a messaging misstep, where the company just assumed that their technology would impress everyone enough that the financials would be an afterthought. And here we are four months later with one more shoe dropping. A truism in communications is lump all the bad news together at one time, dribbling it out over time heightens the pain of its impact. We understand Intel had reasons beyond their control for the timing on some of these items, but so many consistent missteps heightens our impression that they do not have a grasp on how to communicate their changes, and more worrisome. they seem to have lost touch with the market.
Last quarter we commented that management was risking its credibility:
Credibility is what matters most now, more than growth, more than technology… we worry the company’s history and culture may stand in its way [of rebuilding that credibility]. The company still has some of the bad habits it developed when it was the market leader. Chief among those is assuming that investors believe their comments about the market.
A year ago, we wrote that “Intel may have turned the corner“, and almost every financial announcement since then has proved that prediction wrong.
To be clear, we think the company has a messaging problem not a business problem. We actually think they are doing all the right things to run the business. For us the biggest risk in these latest results is that the Board loses its nerve and changes course. That would be a colossal mistake. That being said, the management team needs to take some very major steps to turn around their perception among investors.
Six years ago, we wrote about the potential for Intel to go private. In that piece we pointed out the chief benefit of being private would be the ability to make massive changes without the constant scrutiny of the public markets. As much as we no longer agree with the financial motivations of that post, we think that sentiment about the Street’s spotlight remains valid. Intel has at least another 18 months – six quarters – hard times ahead. We still believe they can achieve that turnaround, but they have to radically improve the way in which they speak to the market.
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