John Hull and All,
The following scenario while hypothetical, is based on deductive reasoning and actual observations. The reader should realize that I was NOT privileged to know what took place at Intel's internal meetings, or even if the meetings described below took place, but it seems reasonable that they did, and therefore I have conjectured that the following must be fairly close to reality. My imagined scenario is what I have used to try to make sense of last weeks events.
It is based on my attending Tuesday's Intel analyst's meeting, the luncheon that followed, and my analysis of the subsequent trading activity, newspaper reports, and analyst's reports which ensued. My hypothetical scenario is presented in the time sequence in which the events may have occurred.
I imagine.. approximately one year ago Intel made reservations for New York's St. Regis Hotel for Monday night, June 2, 1997 It would be here that they would host their annual dinner for selected analysts and Intel investors. Probably about the same time they reserved the Hudson Theater for the next day, Tuesday June 3, to host their semiannual analyst meeting. Unlike previous years, this analyst's meeting would be expanded to include attendance from more representatives of the press and media, (a mistake, I thought, which I will describe later).
Now let's skip ahead to sometime approximately two weeks ago, the week beginning May 26, 1997. Imagine that someone at Intel, (we'll call him Mr. X) , is responsible for monitoring Intel's sales. He receives his weekly sales report and now for the first time he becomes worried. Revenues it seems, for the second quarter, are NOT shaping up as anticipated. Mr. X has been around for awhile, and although he has seen Intel's sales sluggish before, this year seems to be different. For one thing he can not point to the exact reasons for the slow down. Sure Europe appears to be weaker then the usual expected seasonal slowdown, but all regions seem to be down, and the "low-end classic Pentium's" sales seem to be lower than anticipated, but perhaps, he reasons, this is only a short term phenomenon and within a week the sales will return to normal. Certainly, in a weeks time the exact nature of the short fall would be clearer.
Toward the end of that week the situation had not cleared up as he hoped. It now appearred that if the trend continued Intel's revenues would fall short of Q2 expectations, by maybe 5 to 10 %. This
however, was a little embarrassing since Intel had just provided guidance to analysts during the April 15, Q1 earnings conference call, just seven weeks earlier.
By Wednesday afternoon, May 28, a meeting must have been called by Intel's management to discus what should be done to correct the apparent revenues shortfall. Of central concern was how to deal with financial analysts, who Intel was scheduled to meet with, the following week. A proposal to postpone the Monday's analyst's meeting in NYC, must have been dismissed immediately, as impossible. Also dismissed quickly was probably a suggestion that a press release acknowledging a potential shortfall be held off until after the analyst's meeting. Also just as fast, the company realized that they had spent too much effort building credibility with analysts and the world. Above all else that relationship could not be endangered. Maintaining external credibility was deemed to be of paramount importance. Therefore, it was concluded that the best course of action, despite being premature, was to issue a press release outlining the current situation to the best that they know at the time.
On Friday May 31, Intel issued its press release alerting the world to the possibility of a revenue shortfall in Q2. The press release was carefully worded and spelled out the fact that sales were sluggish at the low end classic Pentium's, and regionally Europe seemed to be a main, although not the only contributor, to the shortfall.
Central to my scenario, is my belief, that had it not been for the pending analyst's meetings of June 3, Friday's press release would never have been made. Certainly, Intel would have preferred to issue the press release only after they knew for sure that there would definitely be a shortfall, and at a minimum, the exact nature of the shortfall. Had they had the luxury of time perhaps they could have analyzed exactly where the problem lay and what steps Intel would be required to correct the situation. However, as Intel too often has realized lately, this is not a perfect world and Intel did not have the luxury of holding back their press release. Consequently, the reaction to the Friday press release was Intel's stock dropping almost 25 points on the news. By the end of trading that day INTC recovered some, but still closed down 12 for the day.
On the following Monday it was probably hoped that investors would understand the dilemma that Intel had been in the previous week. Certainly the analysts would realize that Intel had fallen victim to circumstances and bad timing. In fact that day the stock recovered some early in the early day, but by market close it again had fallen.
That night, at the dinner for analysts, Intel was the unable to respond to questions on the exact nature of the expected revenue shortfall Neither were they able to shed more light Friday's announcement. Indeed this was unfortunate for Intel for now analysts would focus on the fact that this was the second year
in a row that Intel seemed unable to control its inventory in the pipeline. "Perhaps, some reasoned, Intel really was a cyclical company?
On Tuesday morning June 3, 8:00 AM, at the Hudson Theater, on 44 St. and Broadway, the analysts began to assemble for Intel's meeting. Over bagels, coffee and Danish, they discussed the upcoming days events. Will Intel give further clarification on Friday's press release?, seemed to be the main topic of conversation. However, at 8:45 AM, the estimated 400 attendees began filing into the theater. The stage was set with six or more computer monitors and PCs. Two giant overhead screens though, were the main focal points. Gordon Moore issued his annual welcome, and outlined the series of Intel executives that would be presenting. The meeting was then turned over to Andy Grove.
As I listened to Andy's presentation, I was all too aware, that everyone in the audience was waiting for additional elaboration of Friday's announcement. But instead Dr. Grove delivered an outstanding presentation on the Intel's future. He discussed many future applications, DVD, video telephone, the managed PC network. He talked about the exciting times which lay ahead and how Intel was well positioned to move ahead with the future. While acknowledging the existence of competition he stated that his real concern was the future growth and health of the PC industry. We were told that Intel sees the industry divided into two separate entities, the enterprise corporate market and the small business/home market. The later, he averred, would be further divided into the "Den PC" for financial, home management, and small business oriented applications, and the "Living room PC" for entertainment, games, video telephone, etc.
Later we are given demonstrations of several of the new applications, the under $200 digital camera which plugs into a rear port, sits on a monitor, and is ready to use right out of the box. We also saw a demo on the significant benefits of MMX and why Intel needed an additional input bus that could only be accomplished by developing "Slot 1". The limitations of "Slot 7" were explained and a software downloading over the managed PC network was also demonstrated. Except for a brief discussion on the importance of clustered processors, and some details on the coming Merced, the presentations seemed to be more oriented toward home use applications than corporate.
The planned program and presentations dealt almost exclusively with how bright the future was for Intel. Global expansion, how computers were allowing developing countries to "leap frog" established country's older business methodologies, and Intel's significant sales and manufacturing presence throughout the world, were all described in detail. But for me perhaps, the Central theme of the meeting and the presentations, can best be described by two graphics which were displayd. The first was a blow up of a item from a Vietnam Newspaper. It was a reporter's interview with a Vietnamese father who was asked why he spent his whole year's salary to buy his 8 year old son a PC. To his seemingly surprise, that he should be asked such a elementary question, the father responded, obviously it was because he loved his son and wanted him to be educated with the best tools available for the future.
The second graphic was a photograph of a street in China. The street had no automobiles, but rather showed a woman riding a bicycle with a box labeled "Intel Inside" strapped to the rear of her bike. It was obvious that the woman was carrying her new computer home, as onlookers watched with obvious envy. The picture said it all, yet not one analyst, or reporter, that I read this week ever made reference to the interview, or the photograph.
Following the presentation the meeting was opened to a Q & A period. But here again Intel got a bad brake. Remember those reporters that I mentioned earlier, that were in attendance, well they dominated a large part of the Q & A. One reporter, from a small newspaper in Australia, asked his third or fourth question. This reporter was not concerned with Intel's future, no what he wanted was a "story". Therefore, his question to Andy Grove was asking him to comment on Digital's claim of antitrust. Later a question demanding further elaboration on the Friday press release was asked.
As I sat in the audience I knew then that Intel's stock would be going down over the next few days. All of that wonderful long term future that was just described, and lay ahead for Intel, was being pushed to the side. Intel had fallen victim again to circumstances and bad timing.
So now I ask you, the reader, what would you do? Intel I thought in the short term may go down. I perceived that most of the other analysts were focused on what would happen in the next quarter, or
possibly even two. However, there was and is no doubt in my mind that everyone there acknowledges Intel's will succeed in the long term. What I want to know is given this understanding, how can these analysts be so sure that if they recommend a neutral rating on Intel, they will be able to get their customers back in to INTC in time?
Two more things that I would like to tell you about before I quit.
1- I believe that no one has reported the reality of the predicament that Intel was in. In addition. I do not think these facts are reflected in Intel's price. Certainly, not before today's run-up, anyway.
2- Andy Grove was asked to give a road map of Intel's future. To this he responded. Although, this was not meant to be a forecast for a certain date in time, he foresaw, in the not too distant future, 1,000,000,000 PCs all interconnected via the Internet. Enabling this PC interconnection network will require not just a few million servers, but tens of millions of servers, to operate.. He said that he has every intent to see that Intel gets the major share. And it is toward this goal that Intel, and he, have been working on, and will continue to work toward. However, in all my readings this week I saw no reporting of this dream.
Jules |
