Mohan, Article...Intel Gets Blindsided, But Not For Reasons You Might Think, Computer Intelligence Analyst Says...
March 9, 1998
LA JOLLA, Calif.--(BUSINESS WIRE) via NewsEdge Corporation -- Poor demand and lower pricing were only partially to blame for Intel's March 4 announcement that 98Q1 revenue would not meet forecast, according to computer industry analyst Aaron Goldberg.
What really happened? Goldberg, Executive Vice President of Computer Intelligence (CI), says data shows a combination of huge Q4 builds and channel stuffing created an inventory "blip" that -- combined with the expected price cuts -- didn't move the chip-sales volume to offset those price cuts. Computer Intelligence is one of the IT market-research industry's leading providers of sales and marketing solutions.
"Soft demand is not accurate, nor the complete story," Goldberg said. "Looking at the demand, it's easy to see that customer buying is still up, but inventory is up too, and there isn't enough demand uptick to offset the huge price declines. This is what caused the shortfall."
When Intel announced that revenue "for the quarter" would not meet expectations, it sent shock waves through the computer industry, Goldberg noted. Some experts said Intel had fallen victim to price competition and sub-$1,000 PCs, or that this event was proof that the PC market is shrinking. Neither scenario is accurate, Goldberg maintains:
"Working on the demand side of things first, it's clear from real data that Q1 has started with a very good January, and initial reports from February support a continuation of the trend. Our StoreBoard channel-tracking indices (which measure sales volume in the current month against the same month one year earlier) show that sales are up across the board. A 1.0 value would be flat sales, but the retail channel is up 35 percent and the dealer channel is up almost 10 percent.
"Combined, Computer Intelligence expects the PC business to post a gain of 16 percent to 20 percent in 98Q1 over 97Q1. In addition, while Q1 is usually no match for the strength of Q4, this year Q1 sales will only drop 13 percent from 97Q4, compared to typical drops of 20% or more."
PC Purchase Index
Dealer Retail
Month Index Index
Jan-97 1.21 0.86
Feb-97 1.17 0.93
Mar-97 1.20 1.00
Apr-97 1.24 1.14
May-97 1.28 1.22
Jun-97 1.35 1.29
Jul-97 1.34 1.33
Aug-97 1.27 1.32
Sep-97 1.16 1.35
Oct-97 1.12 1.27
Nov-97 1.14 1.25
Dec-97 1.07 1.26
Jan-98 1.08 1.37
Source: Computer Intelligence StoreBoard, 1998
-0-
The question is, Goldberg said, did Intel expect even stronger
demand, spurred by their price cuts, to achieve even greater sales
volumes to offset lower prices?
"That's surely part of the story, based on our analysis," he
said. "However, to say in a blanket fashion that demand isn't there
just isn't true. From Intel's perspective, there probably was not
enough percentage growth to offset the percentage price declines, and
then the inventory situation tipped everything over.
"It's a delicate balance between price cuts to drive sales and
enough sales growth to offset the price cuts, thus achieving the flat
revenue Intel initially projected. Add a little excess inventory and
the demand equation, from Intel's perspective, gets thrown completely
out of whack." Reinforcing this "inventory as catalyst" argument are reports of onversations between Intel and its major OEMs in which Intel offeredto sell at greatly reduced prices, Goldberg said. But system vendors said no. "The fact they said no indicates that inventories were an issue, because new lower-cost systems being built while you have old, higher-cost systems in the channel is the road to ruin for a system vendor. If it was a demand issue, you know that system vendors would have grabbed cheap chips and flooded the market, as has worked so often before."
The inventory situation started in Q4 when some of the major vendors "stuffed" a lot of inventory into the channels at the very end of the quarter, Goldberg said. This had the effect of helping their Q4 sales numbers and, based on component manufacturer
incentives, this inventory was priced right for Q4 manufacture and
sale; it also created more inventory than normal in the channel,
noted Goldberg.
The result of this extra "stuffing" of the channel was to create an inventory "blip," that, while not huge in proportion, caused a ripple effect in which the manufacturers saw a need to push out their orders slightly, according to Goldberg.
"Sales are still strong, which helped get most of the inventory through the channel," Goldberg said. "But clearly there was still enough inventory in the channel after the vendors received their February sales data to cause them to push out future purchases of parts, including CPUs, to keep inventory in reasonable balance, and Intel was caught."
Inventory Units as Percent of Total Sales in the Channel
Mar-97 19.00%
Apr-97 20.95%
May-97 17.87%
Jun-97 12.48%
Jul-97 12.84%
Aug-97 14.06%
Sep-97 13.54%
Oct-97 20.95%
Nov-97 18.68%
Dec-97 18.94%
Jan-98 22.09%
Source: Computer Intelligence StoreBoard, 1998
To say that Intel's statement portends a long period of "poor demand " is bad analysis, Goldberg said.
"Could Q1 be off for some vendors? Possibly, but that may not be the case after all is said and done. From my perspective, it's a case of Intel having to keep too many balls in the air at once successfully. The pricing ball and the demand ball are tough to balance by themselves, and when the inventory ball got thrown in, things fell down.
"This will work itself out, but it's not the end of the PC business, and Intel's bad demand forecast does not equal a shrinking PC market. This is one tough tactical market, and it takes just one slip, or unexpected inventory blip, to send your stock price down 15 percent -- even if you are Intel."
_____________________________________________________________________
Regards, Michael |
