Category Archives: earnings conference calls

Intel’s restructuring announcement yesterday

April 20, 2016 By in earnings conference calls, Uncategorized Tags: , , , 1 Comment

Yesterday, Intel (INTC) announced 1Q16 earnings that were up year on year and more or less in line with the Wall Street consensus.  It did, however, lower full-year 2016 guidance a bit, based on a weaker than anticipated PC market.

More important, the company also disclosed a major restructuring aimed at orienting INTC away from its legacy personal computer business and toward the cloud.  The restructuring will eliminate about 12,000 jobs, or 11% of INTC’s workforce.  It will result in a $1.2 billion charge against 2Q16 earnings and is intended to be saving $1.4 billion annually a year from now.

The plan appears to be at least in part the brainchild of Venkata Renduchintala, recently hired away from Qualcomm to be INTC’s president–with the intention of having him make the kind of changes just announced.

Reading between the lines, this is a good news – bad news story.  The good news is that INTC, seeing the Ghost of Christmas Future in Hewlett Packard, is making significant changes to reorient its business.

The bad news is that it sounds to me like there may be a significant anti-change bureaucracy entrenched at INTC.  This is what I read the Oregonian as saying when it cites “a lack of product/customer focus in execution” as Mr. Renduchintala’s conclusion from his review of INTC’s manufacturing operations.  That’s also the reason, I think, for changes in senior management.  Maybe a fat-cat attitude is not so odd for big corporations in general,  but it’s of disappointing for a firm whose former chairman and manufacturing chief wrote a management book twenty years ago titled Only the Paranoid Survive, stressing market awareness as key to success.

In practical terms, I think what this means is that INTC is still a bit more GM-ish than I had thought possible. In consequence, the transformation INTC has been talking about for years and which current top management clearly wants won’t take place overnight. Still, I think that the moves INTC is making are needed and are an overall plus.

Pre-market reaction has been mildly negative.  I guess that’s about what one should expect.  Personally, I’m encouraged and remain content to collect the dividend and wait.  I’d be tempted to buy more on a selloff.

the Bain luxury goods worldwide study, winter 2015

January 20, 2016 By in earnings conference calls, Uncategorized Tags: , , , 1 Comment

I haven’t owned Tiffany (TIF) for a long time, but the ticker is still on my screen.  Watching the stock slide on a weak earnings report yesterday prompted me to look for the latest Bain study of the luxury goods industry, which was published about a month ago.

Although structural change is not the main focus of the report, that’s what really jumps out to me from it.

exiting the twentieth century…

Fifteen years ago, the personal luxury goods market was perhaps 40% European purchasers, 35% American and 25% Asian, most of that being Japan.  Each purchased primarily in his own region.

Although the report doesn’t mention this, the pricing structure for identical items was/is 100 in Europe, 120 in the US and 140 in Asia.  This difference is partly a function of import tariffs outside Europe, partly a judgment about what the market would bear.  Asian sales were unusually lucrative because, in addition to the much higher selling prices, wholesale margins were significantly higher and most profits recognized in Hong Kong, where the corporate tax rate for international concerns is zero.

Virtually all sales were at full price.  European luxury goods makers had few retail stores;  their distribution was primarily wholesale.

…and now

 

Chinese consumers, who represented 1% of the market in 2000, accounted for about a third of all purchases in 2015.  Japanese consumers, who were about a quarter of the market at the turn of the century, now make up about 10%.

Today, sales in Europe and the US each make up about a third of the personal luxury goods market, with Japan and China dividing the rest about equally.  However, more than half the European sales are by extra-regional tourists.  About a third of US sales and 25% of Japanese are also by tourists.  Tourist sales in China are negligible.  I’m not sure why; high prices and counterfeiting are my guesses.

Looked an nationalities a different way, European customers buy 90% of their luxury goods in Europe in 2015.  Americans bought almost exclusively in the US, with a tiny fraction in Europe.  Japanese consumers made 40% of their purchases outside Japan, primarily in non-China Asia, with the US and Europe taking smaller slices.  Chinese consumers bought only 20% of their luxury goods domestically last year.   They made about 30% of their purchases in Europe, another 25% elsewhere in Asia and the rest in the US and Japan.

One of the factors driving the large tourist market is, of course, the much higher domestic prices for Asians.  A second is the significant currency depreciation of the yen and the euro, which have made not only foreign stays but also foreign luxury goods purchases much less expensive.

10% of the global market is now in off-price stores.  That’s double the percentage of three years ago.  Markdown sales, including off-price stores, accounted for about a third of the market last year.

7% of sales are online, most of that in the US.

an inflection point

Bain thinks–correctly, in my view–that much greater awareness of regional price differentials, significant recent currency fluctuations, the rise of markdown sales at a time of steady price increases by luxury goods manufacturers have all conspired to undermine the belief that branded luxury goods have enduring value.

I suspect there’s more at work as well–generational change and the rise of new high-end local brands with greater appeal to younger customers.

TIF

Back to TIF for a moment, the company’s announcement that it expects a 10% fall in earnings for fiscal 2015 and “minimal” earnings growth in 2016 limits its near-term appeal.  At some point, though, it could become attractive again, despite ructions in the overall luxury goods market.  …$50 a share?

 

4Q15 for Intel (INTC)

January 19, 2016 By in earnings conference calls, Uncategorized Tags: , , 1 Comment

After the close last Thursday, INTC reported results for 4Q15 and the full year.  For the final three months of last year, INTC posted revenue of $14.9 billion, operating income of $4.3 billion, net of $3.6 billion and eps of $.74–all better than the Wall Street analyst consensus. The company also announced an 8% increase in the dividend, to a yearly total of $1.04.

Nevertheless, in Friday trading the stock was down by 9.1%.

What’s going on?

There are lots of moving parts, but in a nutshell INTC appears to be forecasting another flattish eps year for 2016–vs. market (and my) expectations of a return to earnings growth.

The main reason is softness in demand that INTC is already experiencing in its important Asian markets, particularly in China.  My back of the envelope calculation is that pre-tax income for INTC will still be up by about 15% this year, despite a China slowdown.  But I think the shift of business growth from Asia to the US + the EU is the main reason the company is projecting a rise in its income tax rate from 19.6% in 2015 to around 25% this year.  That’s enough to wipe out virtually all the pre-tax improvement in the business.  So the bottom line remains basically unchanged.

Another worry:  during 4Q15 revenue from INTC’s important server business decelerated from a 10%+ growth rate to just over 5%.   Operating income fell by about 4% yoy, as high margin cloud sales cooled while low margin networking sales boomed.  INTC points out that 4Q14 was a record quarter, so simple yoy comparisons may be misleading.  It also says that the fourth quarter has become important enough for online sales that cloud customers don’t want to fool with their websites by installing new equipment.  So for its most important class of customers, 4Q is no longer the seasonal peak for orders, as it has been in prior years.

Two oddities:

–for reporting to shareholders (financial accounting)  INTC is changing the way it expenses the chip manufacturing equipment it uses.  It previously wrote their cost off in equal installments over four years.  It’s now going to use five.

Nothing changes in the way the business is being run or in the way the equipment is written off for income tax purposes.  But annual depreciation cost on the income statement will be about $1.5 billion less than under the old method.  In broad terms, this is enough to offset the rise in the tax rate for 2016.  It’s also the largest factor involved in my thinking pre-tax income will rise significantly in 2016.

It’s hard to know whether Wall Street will regard this accounting change as a good thing of a sign of weakness.  I presume algorithmic traders won’t care.

–for the past couple of years, INTC has tried to buy its way into the tablet business by essentially paying customers to use its chips (the company calls this support contra revenue).  The company appears to have pared back the subsidies significantly during 4Q15.  Tablet units decreased from 12 million in 4Q14 to 9 million in 4Q15, as a result.  But overall tablet revenues increased.–and operating losses in the segment appear to have shrunk.

My bottom line:

For the moment, I’m content to hold the stock.  There’s enough evidence from other hardware companies to suggest that the Asian slowdown is an industry phenomenon, not an INTC specific one.

We’ll also know in a quarter or so whether the cloud business bounces back or not.  Given the significant shift in retail from bricks and mortar to online this holiday season, I’d expect to see strength in cloud orders during 1Q16.

Finally, I’m a bit troubled about the change in depreciation policy.  The effect is to make earnings look better than they would otherwise be.  Is that the purpose, though?  Was INTC forced to do so by its auditors, or is this simply optics (which would be a very bad thing, in my view)?  I’m not sure.

3Q15 for Tesla (TSLA); do an extra 4,000 cars make a difference?

November 5, 2015 By in Autos, earnings conference calls, Stock ideas Tags: , , , , , , , Leave a comment

Yesterday, TSLA shares were up by 11% after reporting an in-line quarter the night before.  This was in a market that was down slightly.

The reason?

The company modified its full-year guidance for production from 50,000 – 55,000 units to 50,000 – 52,000 units.  With 4Q15 almost half over, investors took this new guidance as relatively reliable.  But the key factor is that the guidance, while down, was not the 45,000 – 50,000 that Wall Street had been fearing.

Wild gyrations are a fact of life for highly speculative stocks like TSLA (I own a small position).  That’s not the interesting part.  After all, what sustains the sky-high valuation of the stock is not the current results is the dream that one day the company will be selling millions of units and earning billions.

What is an important investment lesson is the reason that a production difference of around 5,000 cars in a quarter, which sounds like a small amount, should make such a difference to investors.

It’s all about cash burn, or the question of how long a company that ‘s using more cash than it’s taking in can sustain itself without turning cash flow positive.  This also happens to be one of the few things in a “dream” stock that’s important and that we can know for sure.

 

In the TSLA case, the firm realized–at the start of 2015, in my view–that the multi-billion dollar bond offering it made in 2014 wouldn’t be enough to sustain it until it began to generate more cash than it used.  Contact with investment bankers resulted in a spate of glowing reports being issued by brokerage house analysts–and then a $750 million stock offering.  What investors has been panicking about a few weeks ago (and may begin to worry about again;  who knows?) is that this extra three-quarters of a billion dollars might not be enough.

If we figure that a fully loaded Tesla retails for $100,000 ( figure I just plucked out of the air), a shortfall of 4,000 cars translates into a cash shortfall of $400 million.  So, “Poof!,” half the cash cushion created by the recent equity offering is gone.  (I’m assuming that everything else for TSLA remains the same, which is probably too pessimistic.  But the exact dollar amount isn’t the point.)

Arguably, TSLA could simply issue more stock or bonds to raise extra cash.  However, if TSLA were actually seen to be needing a loan, the terms it could expect to get would probably not be as favorable as before.  Another offering so soon after the last equity raising would also risk shattering the investor “dream” of the inevitability of TSLA’s success.

TSLA now expects to turn cash flow positive during 1Q16.  This does not imply that it will be cash flow positive for the entire quarter, or for the quarter as a whole.  Instead, it means that it will begin taking in more money than it spends by March 31st at the latest.  We’ll know more when Tesla reports 4Q15.

2Q15 earnings for Intel (INTC): back to waiting mode

July 16, 2015 By in cloud services, Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , 1 Comment

the results

After the close last night, INTC reported 2Q15 results.  Revenue came in at $13.2 billion, down 5% year-on-year.  Operating profits were down by 25%.  Net was $2.7 billion, however–off by only 3%.  EPS came in at $.55, flat yoy (due to continuing share repurchases shrinking the total shares outstanding).  That figure beat the analyst consensus of $.51.

The main points, as I see them:

–cloud business was stronger than expected

–PC business was weaker, due presumably to overall GDP softness in emerging markets, especially China, and in the EU

–the overall business is shifting to higher-end, more cutting-edge products.  This is resulting in lower than expected volumes.  Higher prices and margins are offsetting this

–even though INTC is expecting a bounceback during the back half of the year from an unusually weak first six months, it is edging down its full-year forecasts slightly to account for continuing weakness is the PC market

–the 2Q tx rate was a miniscule 9.3%, compared with 28.8% in 1Q.  That’s because INTC has decided that some cash balances earned abroad and held overseas are permanently invested there and is asking the IRS for a refund of taxes previously paid on this money.  Eps would have been around $.47 at the 1Q15 tax rate.

waiting for…

–the Altera (ALTR) acquisition to close and new field programmable gate array-based microprocessor products to emerge

–world GDP to accelerate

–the product balance to shift to non-PC products (the cloud, the internet of things…) to a degree that they, not PCs, define the company

–tablets to become profitable

in the meantime

I’ve been surprised by the weakness in INTC shares over the past six weeks or so, as the extent of softness in the 2Q15 PC market has become apparent.

My picture has been that the stock goes sideways, supported by a discount PE multiple and a 3%+ dividend yield, while the company (successfully) transitions into a post-PC world.  I continue to think that this is not so bad for shareholders during a time like the present when the market in general is likely to go sideways.

The key question, for which I have no strong answer (because I’ve been thinking I still have time to formulate one), is what to do as/when economic activity begins to accelerate.  Clearly, in my mind at least, if overall corporate profits begin to rise quickly, being paid 3% to wait for future developments won’t appear to be such a good deal.  I don’t think the current weakness in INTC shares is the first inkling of this sort of shift.  But it’s something I have to consider.