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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Road Walker who wrote (63882)	9/3/1998 9:10:00 PM
From: Paul Engel	Respond to of 186894

John - Re: "Intel years ago said their primary concern was gross margin dollars,.." Thanks for that clarification - it was very well written. Maximization of Gross Margin Dollars - I will try to remember that goal! Paul

To: Road Walker who wrote (63882)	9/3/1998 10:15:00 PM
From: Fred Fahmy	Read Replies (2) \| Respond to of 186894

John, <Intel years ago said their primary concern was gross margin dollars, NOT gross margin percentage. I believe that is still their financial policy.> Yup....and this goal is re-stated each year in their annual report. 1997 annual report "Intel's primary goal is to get its advanced technology to the marketplace, and the Company sometimes implements strategies that increase dollar margins but lower margin percentages. These strategies include the SEC cartridge, as discussed above, and the Company's plans to grow in non-microprocessor areas that have the potential to expand computing and telecommunications capabilities, an example of which is the acquisition of Chips and Technologies, Inc." 1996 annual report "The Company's goal continues to be to grow gross margin dollars." FF

To: Road Walker who wrote (63882)	9/3/1998 10:37:00 PM
From: ron delany	Respond to of 186894

John and Paul re: margins, thanks for the explanation regarding percentage vs. dollar margins. I guess my confusion came because I've always assumed profit margins exist ONLY as percentages. Learn something new etc.

To: Road Walker who wrote (63882)	9/4/1998 8:04:00 AM
From: nihil	Read Replies (1) \| Respond to of 186894

RE: Margins RE: Profitability The firm wants to maximize EPS: (1) maximizing this quarter's EPS with firm and industry facilities fixed (QEPS), (2) and setting present prices to maximize sustained growth of EPS (GEPS). If Intel maximizing QEPS box makers EPS would be squeezed. They will not remain captive for long. CPQ, for instance, could fill all of their PC's to AMD, start working on Alpha and AMD server expansion, and really kick Intel in the corporate groin. Maximizing Intel GEPS requires a future price-product mix that allows customers to maximize their own GEPS while continuing to tolerate high Intel market share. It is not a simple equation (MC=MR), but a highly complex set that involves reaction curves of everyone who matters (Dell, CQQ, GTW, AMD, etc.). It is probably safe to assume that everyone will pursue a strategy to maximize EPS, and that any departure will be random -- except for Jerry Sanders. The decisions to buy NexGen and later to price K6 25% under PII appear (in retrospect) to be irrational, but NexGen was really a "nonshutdown" decision. Without NexGen AMD would have been excluded from the mpu market by now and that would have killed them death (and almost everyone else in semiconductor manufacturing except Intel is losing money now). No one is rational in exiting a market (see Grove's discussion of how long it took Intel to exit memory). The result of all this is that Intel chooses the price-product mix such that the present value of discounted future net margin dollars is a maximum. To reduce risk, it needs to bias the decision to offer lower prices than appear optimal to avoid attracting kamikazi -- badly managed new entrants attracted by what they perceive as high profits (IDT?). In the short-run this looks like gross margin dollar calculation, since tax rates, interest, and depreciation are unavoidable, but in the long-run they are variable and must be considered (put the Fab in Ireland or Oregon?). Thus Intel's periodic price cuts are part of a long-term strategy and Intel offers price guarantees. The size of each cut is determined by both long and short-term market conditions. This strategy automatically cannibalizes the market for old chips. New chips are usually manufactured on the latest equipment, are smaller, faster and cooler. The old chips have to go, even if the fab is completely depreciated. The new chip has a lower incremental cost per unit of performance than the old chip. Everything argues for getting the new chip into customers' hands and to stop making the old one (whose price is lower, but not unit cost of performance). The decision to build the new fab was made before the chip was designed -- it is there -- Intel needs to fill it and run it and the faster this is done, the faster the old fab is emptied. The best way to do this is to drive the cost of performance down and sell the new chips instead of the old ones. Viewed in this light, Intel appears to be a highly rational planner. Neither short-term EPS or market share are pursued for themselves. Maximizing the present discounted value of long-term net margin dollars works because nothing is done in the short-run to sacrifice future market share, yet market share is not "bought" by pricing under full cost. Of course, with a vigorous enough challenge, Intel might have to price below full cost (i.e. lose money or have negative EPS). AMD doesn't now appear to offer this challenge, but if Intel had ignored such challenge as it made, and if AMD had been more successul in making chips, it could have seized more market share last summer and accelerated Fab 30 and K7. The Celeron will be viewed in retrospect as a game saver. There is no such thing as being too good in this business. But as the saying goes -- better late than never. Sorry it's so damned long, but I didn't have time to write a short one.