July 22, 2009 © 2009 MGI RESEARCH, LLC
What the Press and Analysts Missed in Intel's Q2 2009 Earnings Call
The strength of Intel’s management and operating expertise was highlighted once again in the 2Q results. Intel (INTC; MGI-X: 2,048) took specific and significant corrective actions to adjust for very tough market conditions, to the delight of press and analysts alike. What do Intel’s results (and commentary) say about its management team, companies with high MGI scores, and the overall outlook for tech spending for the rest of 2009 and 2010?
Beyond the heaping accolades after their 2Q09 earnings call on Tuesday, July 14, 2009, three things stand out, and went notably under-reported. First, after several quarters in which revenues fell dramatically (from $10.2 billion in Q3 last year, to $7.1 billion in Q1 of this year), Intel managed to perform well on multiple fronts: it eliminated 2,000 employees (approximately 2% of total employees) and part of a continuous effort to streamline operations, the sales force delivered above (much reduced) revenue expectations although ASPs were down, and R&D programs remained on track. Not many companies can simultaneously cut their workforce, execute in sales and marketing with pricing under pressure, and maintain an intense focus on R&D all in one 90-day period. There is a reason Intel’s management has consistently outperformed its peers. Intel’s MGI scores, a measure of management effectiveness and overall corporate efficiency, have always been significantly better than competitors like AMD (MGI-X: 650). Companies with high MGI scores tend to strongly outperform their market. CEO Paul Otellini is proving he is a much more capable executive than “just a sales and marketing guy” as some cynics sniped when he was elevated to the CEO position. Further, the high MGI scores and impressive results of the second quarter attest to Intel’s culture of sound management. Intel is the rarest of IT companies that is on its third generation of executive leadership, and is long past the days of being led through the force of a single personality or founder. INTC’s high MGI scores have stood the test of time and successive management teams.
The second under-reported highlight of the earnings call was management’s quotes on IT demand through this year and into 2010. Specifically, Otellini said,”we are not out there thinking that there’s a recovery to prior levels in the aggregate. In terms of the enterprise, I actually, -- we are not planning for a refresh this year.” He went on to say that while he sees a refresh coming at some point given the aging of corporate desktops and servers, “we’re not counting on that happening in large measures in 2009”. An additional comment on overall demand was, “you can’t lose sight of the fact that there is still a lot of economic volatility out there. We still see a weak enterprise market…” While press and analysts are eager to report the glass being half full, a sanguine observer would simply note the fill level of the glass – the demand picture is unclear, and Intel management does not see obvious demand drivers for the rest of this year, and into 2010. Separate from the INTC commentary, our research indicates that the historical refresh cycle may be fundamentally broken. Most companies have abandoned the 3 or 4 year refresh of PCs and servers, and are simply replacing machines as they break. Further, there is little evidence that Windows7 will be a demand driver like Windows95 or WindowsNT was in the Glorious 1990s of tech.
Finally, a third observation on INTC is what an exception Intel is. Few companies command the global market share that Intel does. It’s no wonder some consider it to be a monopoly/oligopoly. This unique position gives Intel the enviable ability to price aggressively and optimize margins across its product portfolio – and puts more wind in Intel’s sails even with light demand. Intel also competes in a broad array of market segments and in every geographic region of the world. This allows it to benefit from things like the stimulus spending in China – something management referred to in the call. Not many companies have the product breadth and geographic reach of Intel. HPQ, IBM, and Oracle come to mind, but none of them has the market dominance of Intel.
The bottom line is that INTC delivered a solid Q2 – as befitting a high MGI scoring company. Companies with MGI scores above 2,000 are more likely to perform well against their lower MGI-rated competitors. One should use caution in reading too much into the Intel results. As exceptional as Intel is, management’s muted comments on tech recovery is telling – strong signs of IT demand drivers for the rest of 2009 have yet to emerge. As a final point, our updated MGI scores for the June quarter will be available once the company files its quarterly 10Q with the SEC. Given our initial review of the results we hope to see some improvement in the MGI scores, however, one of the advantages of MGI’s quantitative model is that it helps identify and isolate specific strengths and weaknesses of the results that are not necessarily visible at first glance – so we will withhold our final view until we see the scores.