Crude oil prices are at an all-time high. The housing market keeps getting worse. Your 401(k) is probably in the tank, and, oh yeah, unemployment is up.
Now here's the good news: Intel executives aren't as freaked out about the economy as the rest of us. In earnings news that had to have had many breathing a sigh of relief, Intel announced Tuesday afternoon that its first quarter, while admittedly difficult, beat Wall Street expectations. More importantly, Intel executives signaled confidence in the year ahead.
Intel's Otellini is still confident about 2008.
(Credit: Intel)"What we're seeing is growing strength in the core business," in the second quarter and through the rest of the year, Intel Chief Financial Officer Stacy Smith said in a conference call with Wall Street analysts. In an offhand comment, CEO Paul Otellini intimated that the biggest fretting is probably taking place in Manhattan (read: Wall Street), but Intel's global business is still going strong, including in mature markets such as the United States and Europe.
Intel, of course, has long been a bellwether for the high-tech industry, along with other giants like Microsoft, Hewlett-Packard, IBM, Cisco and--dare I add to the list--Google. But for people who follow the tech economy, the chip giant's sales forecast is usually the single best gauge of how the industry will fare in the coming months. It is, as CNET News.com's Tom Krazit wrote Monday, tech's canary in the coal mine. (Tom has a more detailed look at Intel's earnings on his blog, One More Thing.)
Don't let anyone fool you: While Silicon Valley is atwitter over social networking and varied Web 2.0 doodads, the real indicators of tech's health are the companies that sell the stuff everyone else builds on. As pundits often said in the Web 1.0 boom, it wasn't the gold miners who got rich during the California gold rush, it was the guys who sold them the shovels.
It's easy to say Intel is benefiting from problems at its faithful rival AMD. But optimists would like to think Intel's forecast is indicative of continued spending on PCs and servers. The forecast could indicate that while many consumers may have given up on buying a new house, they haven't given up on buying a new PC. And big companies, even the Wall Street financial institutions reeling because of the mortgage crisis, are still buying new servers.
Another factor Intel mentioned: Companies building out on the back-end to take advantage of so-called cloud computing. Maybe Facebook isn't the only young outfit planning to spend big this year to improve its data centers. Like I said, selling shovels (or servers) is a great business during a boom.
That's not to say everything is rosy in tech. While Intel was optimistic in the face of skeptical questioning from analysts Tuesday, storage manufacturer Seagate lowered its forecast for the current quarter. And we're waiting on earnings news from some of the other bellwethers: IBM reports Wednesday, and Google reports Thursday.
That's the tricky thing about forecasts: You can only go on what people tell you. That chief information officer at a big bank may think he's buying a truck full of new x86 servers, but if his CFO panics because bad sales reports are starting to trickle in, the servers are going to stay in the truck.
Another reason for caution: The last time there was a tech bubble, executives at even the biggest companies said everything was just fine...right until it wasn't. And even the most enthusiastic of Web 2.0 boosters would have to admit this year is going to be make or break for plenty of companies relying on advertising for their revenues.
There's an old joke about being an economist: You never have to say you're wrong. You've just changed your analysis based upon new data. Right now, Intel is only one part of the data puzzle. If the national and global economies continue to worsen, only a fool would think tech could avoid taking a hit.
But chastened honchos at companies like Intel would be happy to blame bad news on a souring economy if they felt a need to do so. At the moment, it seems clear at Intel at least, there's no need.
It seems we're all just searching for a way to keep score.
The beauty of sports is that there is always a winner. The beauty of life is that it's not like sports. Sometimes you win, and sometimes you lose. Sometimes you get two-thirds of what you expected after leaving something on the table to get that far, and sometimes you fall short of a goal but find yourself better for the experience.
That's why we have sports, to amuse ourselves with contests that fulfill a need for clearly defined winners and losers but that don't turn the world on its side or redistribute billions of dollars. We expect our teams to win, and we're saddened when they don't (thanks a lot, Yadier Molina) but there's an inherent assumption that's it's all just for fun.
Back in the real world, however, it's a little messier. The sad admissions made by Dell yesterday underscore how those lines can blur.
Dell revealed Thursday that its internal accountants gamed a system--with the knowledge of senior management--designed to reward companies that hit their numbers. It's usually a single number that determines the stock market's reaction to a financial earnings report: earnings per share, or net income divided by the number of shares outstanding.
No matter what positive news might be contained in an earnings release, if EPS comes in even a penny below estimates, watch that stock price fall the next day. Just last month, the current darling of the tech stock crowd--Google--reported earnings per share 3 cents lower than expectations. Despite a 58 percent jump in revenue, a 28 percent increase in profits, and a whopping overall EPS of $3.56, the company's stock fell 5 percent the next day, and it hasn't recovered.
Everyone's guilty in this game. The stock market buys and sells based on that number, perhaps the revenue figure as well, but with little regard for the broader picture. A media report will talk about a company's brilliant execution, or start looking for scapegoats, based on a 2-cent swing in EPS. Executives are heavily compensated with stock options that make them obsessed with keeping the price as high as possible.
The most egregious periods of Dell's earnings manipulation prevented the company from missing its earnings per share targets by a few cents. Would that have taken away from the fact that during that period, Dell's overall performance was still far stronger than the rest of the PC industry, and maybe the entire tech industry? Dell executives apparently thought so, and they probably would have been right had the real numbers been reported.
This, of course, doesn't excuse Dell's actions, which illustrates the thorniness of the problem. Missing those targets would have served as a warning sign for investors that the company was fallible after all, perhaps giving them some time to bail out before Dell's myriad problems were unable to be concealed by creative accounting. Some metric is clearly needed to assess performance, but what?
Another reason to love sports is statistics: clear barometers of who is good, and who is not. If you get a hit 3 times out of 10, complete 60 percent of your passes, or put the ball in the hoop 2 times out of 5, we like you.
The problem is we're doing the same thing with massive corporations, organizations with thousands of employees and customers whose performance can't be summarized by a single number, even two. And the reward--or punishment--attached to those numbers doesn't correspond with reality.
I'm not smart enough to have a solution at the ready. But let's take the sports out of business. There are always going to be winners and losers in a capitalist system, and investors need to have a way of measuring whether they are getting a proper return on their outlays. The business community needs to figure out a broader way to draw conclusions about a company than a single number that is apparently very easy to manipulate.
Then, let's take the sports out of politics.
Apple seems to be doing pretty well these days.
For its fiscal third quarter, the company reported profits of 92 cents a share after the close of the stock market Wednesday, 9 cents higher than Wall Street was expecting and 26 cents better than the company's own projections. And the magic number? Apple reported selling what appears to be 270,000 iPhones during the two days before the quarter ended on June 30.
UPDATE 2:14 P.M. PDT: Apple CFO Peter Oppenheimer has confirmed 270,000 iPhones were sold in those two days.
Revenue for the quarter was $5.4 billion, as compared with Wall Street's expectations of $5.2 billion and Apple's own projections of $5.1 billion. Mac shipments grew 33 percent compared with last year, while iPod shipments were up 21 percent.
The iPhone category includes "iPhones and Apple-branded and third-party iPhone accessories," so it was not immediately clear from the press release whether the 270,000 units refers to iPhones alone or iPhones plus cases, headsets, etc. The iPhone numbers will be closely scrutinized coming off of Tuesday's news that AT&T only activated 146,000 iPhones.
The company will hold a conference call at 2 p.m. PDT to discuss its results, and hopefully we'll get more clarity on the iPhone shipments then.
UPDATE 2:08 P.M. PDT: Apple's overall profit for the quarter was $818 million, that's a 73 percent jump compared with last year, when third-quarter profit was $472 million. Revenue was up 24 percent compared with the same period last year when it was $4.37 billion.
Notebook sales led the charge for the Mac division. Apple shipped 1,130,000 MacBooks and MacBook Pros during the quarter, up 79 percent compared with last year. Desktop shipments were also up, 634,000 units this year compared with 529,000 units last year.
Apple doesn't break out its iPod results by category, but it was interesting to note that while shipments increased to 9.8 million compared with 8.1 million units during the same period a year ago, revenue increased by a smaller amount. Apple's iPod revenue was $1.57 billion during the quarter, compared with $1.5 billion the same time last year.
I contacted an Apple spokesman about the iPhone numbers, to verify whether 270,000 units means 270,000 iPhones or 270,000 iPhones plus accessories. I hadn't heard back as the conference call was about to start, with soothing classical guitar in the background.
Counting iPhones is harder than it looks, at least from the outside.
Coming off iPhone Weekend, the numbers game flew through the air as financial analysts tried to guess how many iPhones were sold by Apple and AT&T on June 29 and June 30, the last two days of the second quarter. Estimates ranged from 200,000 to 700,000 for the whole weekend, which is why AT&T's report of 146,000 iPhone activations on Tuesday was quite the buzzkill heading into Apple's earnings Wednesday. Apple's stock closed down $8.81, or 6.13 percent, at $134.89.
How many iPhones did Apple sell?
(Credit: CNET Networks)To be clear, activations aren't equal to iPhone sales. The problems AT&T had activating iPhones the first weekend were well-documented, and that could have stretched the activation process past Saturday night and into AT&T's third quarter for many iPhone buyers.
The more important number will come Wednesday from Apple, which I suppose gives everyone a buying opportunity back into the stock if they like. Indeed, Apple's stock was up a dollar in after-hours trading. What's clear is that Apple sold at least 146,000 iPhones in about 30 hours. Wednesday's number should be larger, given the activation delays.
It's a classic, "buy on the rumor, sell on the news" scenario. Once numbers like 700,000 iPhones started getting tossed around, and solid analysts like Piper Jaffray's Gene Munster started floating 500,000 units, the expectations became unattainable and anything short was going to be profoundly disappointing for many.
After all, going into iPhone Weekend, the same group of analysts was predicting the companies would sell between 150,000 to 200,000 iPhones, which it seems they did. However, after the hoopla of iPhone weekend, estimates went through the roof.
Let's see what Apple has to say Wednesday before declaring iPhone Weekend a success or failure. Personally, I think it will be more interesting to wait until the end of the current quarter to see if Apple managed to sustain iPhone momentum after the diehard fans ruled the opening weekend, before pronouncing whether the iPhone exploded out of the gates or stumbled around the first turn.
This quarter was all over the map for Advanced Micro Devices.
It was just too hard to come up with an quick summary of AMD's fortunes. Overall revenue was up, but AMD didn't have a graphics division this time last year. Profits were horrific, but gross margins improved. Chip revenue was down compared to last year, but chip shipments were up 38 percent compared to the first quarter of this year (usually, second-quarter shipments are flat or down compared to the first quarter).
So, rather than glaze over everything in trying to present a comprehensive narrative, here's the good, the bad, and the ugly from AMD's second-quarter earnings release and conference call.
THE GOOD: Chip shipments soared as as a customer and took a broader role inside customers such as Dell. Shipments of notebook chips--arguably AMD's weakest sector--were up 82 percent compared to last year, and 21 percent compared to the first quarter. The company appears to have stopped the erosion of its market share, and it thinks the PC market is healthy going into the second half of the year. It also stabilized the average-selling prices of both its notebook and server chips, perhaps a sign that the year-long price war between Intel and AMD is easing.
THE BAD: Barcelona and Phenom, two chips that AMD desperately needs to improve its fortunes, won't arrive for quite a while. Barcelona, AMD's long-awaited quad-core server processor, is later than expected because it was "complicated" and "required a bit more design work than we anticipated," said Dirk Meyer, president and chief operating officer at AMD.
Barcelona isn't expected to contribute meaningful revenue until the fourth quarter, and Phenom will launch too late in December to help AMD in the desktop market until 2008. As a result, the company is merely hopeful that it will reach break-even status by the fourth quarter. It will probably need to do $2 billion in revenue and have a gross margin of at least 40 percent to hit that target, said Bob Rivet, AMD's chief financial officer.
THE UGLY: AMD's chip division recorded more revenue in the second quarter of last year than during this year's second quarter--and spent almost twice as much money to even get that much business this time around. That means AMD lost money simply operating its core business, not even taking into account the other expenses required to run a corporation such as marketing, research, and electricity.
The company wrote off $30 million in inventory that it gave up trying to sell. In order to cut short-term expenses, it will have to slow the ramp of Fab 38, its project to convert an existing facility in Germany to a more modern plant so it can reduce manufacturing costs in the long term. And it's holding a chip manufacturing bake sale--of sorts--hoping to raise cash by selling off old tools.
Hector Ruiz, AMD's chairman and CEO, declined to specify any other changes that might be coming, but it sounds like this isn't the end of the cost-cutting. AMD is working on a strategy called "asset-light," which it hasn't exactly spelled out and can't do so yet for "competitive reasons," Ruiz said.
Next week, AMD will hold an analyst day that in the past has provided a pretty detailed look at AMD's future processor road map and strategies. That should also produce many questions about how AMD plans to shore up its profits in the second half of the year without huge contributions from its new products.
Intel CEO Paul Otellini's 2006 cost cuts, painful as they were for Intel employees, paid off Tuesday as the company's second-quarter profits rebounded compared with last year.
The chipmaker posted a 47 percent increase in net income during its second quarter, up to $1.3 billion or 22 cents per share. The Wall Street crowd had been expecting 19 cents per share. Intel said it had 90,300 employees during the second quarter, way down from the 102,500 employees it had at this time last year.
Revenue was also a little stronger than had been expected, up 8 percent to $8.7 billion compared with expectations of $8.5 billion. The stronger revenue growth came despite the continuing decline of Intel's average selling prices as a result of strong price competition with Advanced Micro Devices.
The second quarter of the calendar year is almost always the slowest period of the year for the PC industry, so it was no surprise that revenue declined from the first quarter to the second. But profit fell substantially compared with the first quarter. Part of the drop can probably be explained by a benefit of 6 cents a share in tax items applied to first-quarter earnings. The taxman was less kind to Intel in the second quarter, as Tuesday's results only reflect a benefit of 3 cents a share. But Intel also reported lower demand for its flash-memory chips.
Executives will hold a conference call later this afternoon to discuss the results in more detail, and we'll have an updated story that looks at Intel's past quarter as well as the company's outlook for the rest of the year.
UPDATE 4:59 P.M. PDT--Intel CEO Paul Otellini and CFO Andy Bryant said during the conference call that demand for PCs and servers was stronger than expected in the second quarter. Pricing is still tough, apparently, especially in the low end of the PC market, but I can't remember a quarter in the last several years in which that wasn't true.
Intel is trying to be more judicious about the low end of the market, focusing more of its attention lately on servers and notebooks, Otellini said. Those are more profitable categories and Intel is pretty strong as compared with Advanced Micro Devices in those segments, he said.
Intel also saw a better showing from its channel program in the last quarter, Otellini said. Intel and AMD both have channel programs that supply smaller system builders with processors, usually low-cost builders in emerging markets that favor desktop PCs. AMD had trouble with this market in the past couple of quarters due to overcommitments, which would naturally give Intel a boost.
One sore spot for Intel was its gross margin, which contributed to the profit drop mentioned above and a sharp decline in the price of Intel shares during after-hours trading. The company's gross margin percentage (basically revenue minus the cost of making chips) fell to 46.9 percent, lower than expected and very low against Intel's historical margins. Analysts used to be disappointed when Intel fell below 55 percent margins, but the year-long price war has taken its toll on both companies--although AMD's margins were down to 28 percent during its first quarter.
This quarter Intel blamed its shrinking NOR flash memory business for the margin disappointment. The company is currently setting up a joint venture with STMicroelectronics to rid itself of the NOR business, which is losing ground to the faster NAND flash memory made by Samsung and others and used in iPods and cell phones. Demand was soft again this past quarter, Bryant said.
Intel's manufacturing operation has become more efficient over the past year, and so the company is reducing the amount of money it expects to spend on capital expenditures, Bryant said. Inventories are down, and the company is on track to introduce 45-nanometer chips later this year, he said.
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