Tuesday, May 02, 2006

Paul called Mike two months ago

Based on this report of Intel stuffing the channel to make 1Q06 numbers.

Paul: Mike, how is your business going?

Mike: Paul, business is slow as hell, you know that. Fewer and fewer people want your outdated chips. Last month, you asked me to take delivery of a huge pile of chips. We haven't gone through half of those yet. And you started to compete against us on EMC business.

Paul: Mike, I know, thanks for accepting those chips, which allowed us to book revenue for Feburary. We promise our EMC reselling business is harmless. BTW, I still have a small favour to ask from you.

Mike: Paul, no problemo, we are buddies for years. Whatever, name it, just don't ask me to take more of your chips, our warehouses are full.

Paul: Mike, I am afraid that I have to ask you to do this for me one last time. I am gonna miss the reduced guidiance by a mile if you don't help me.

Mike: Again? We still got millions of your chips rusting in our warehouses. We have to guard them. The chips worth hundreds of millions, and my insurance company won't pay a dime if someone steals them.

Paul: No worry there, Mike. I heard thieves only want AMD chips these days, they are selling very hot on ebay.

Mike: Paul, my friendly advice, you can't just stuff the channel to make your numbers like this. What about your next quarter?

Paul: Mike, I will deal with next quarter later.

Mike: You said the exact same thing last quarter.

Paul: Mike, I promise this won't cost you anything. Just take our inventory, name your price.

Mike: But, our warehouses are really full.

Paul: We don't have to ship the chips to your place. We just need to change the owner of those chips to you in our database, it takes just one second. No hassle there.

Mike: OK, I will pay you 20% of the list price.

Paul: Mike, at that price, I will have to give you 5 times the units to make our quarterly number.

Mike: What if I can't sell them?

Paul: We will give you rebate for unsold chips one year later, no risk.

Mike: Sounds agreeable to me. Now I can sell Core Duo notebooks for $499 to strike HP and Lenovo hard.

Paul: Mike, sorry to tell you, but they already took delivery of our chips ....

Mike: So, we are going to have a global garage sale from Asia to US?


Anonymous Anonymous said...

intel claimed that they can sell millions of their pentium chips in 2 weeks.

is that even possible?

10:28 AM, May 02, 2006  
Anonymous Jeach! said...

When I read the article I wasn't too sure I understood the 'economics' of "suffing the channels". (I guess I'm a little 'slow') :)

Great 'transcript' Sharikou... cleared a few things up!!

Isn't this a 'win-loose' situation for Intel?

They win because they get to liquidate their inventory without having to write it off. But they loose because they risk of slowing future demand due to the large quantity of their 'cheaper' parts?

Or is there some greater evil that I missed?

7:40 PM, May 02, 2006  
Blogger Sharikou, Ph. D said...

The following transcript from Intel's 1Q06 CC covers the same topic

Ben Lynch - Deutsche Bank

Andy, a question for you and sorry it’s a little bit long, but I think you’ll get the gist of it. You guys attributed the trend of the Q4 revenue shortfall to excess customer inventories at the end of Q3. Then you attributed the original 300 million shortfall in the Q1 guidance to customer; again, 300 million customer inventories at the end of Q4. Now you’re saying Q2 below seasonal is — I guess it works out about 400 million excess inventory. That sounds like a lot of accumulated excess inventory.

Is part of what you’re saying here is maybe the initial diagnosis was wrong on that? The way inventories work, if Q1 already saw some inventory drawdown, which I think you said, then for Q2 to be below seasonal, then the amount of drawdown would be a lot more than it was already in Q1. But if you’re saying there’s only one to two weeks of excess out there, that doesn’t seem possible. I’m really just trying to understand all of that, please. I do have a follow-up.

Andy Bryant

Okay. So, my answer will be as long as your question, is my suspicion. As we ended the third quarter, we believe there’s about $100 million of excess inventory out there. Looking back it’s possible there’s a little bit more, but not significantly more.

In the fourth quarter, we believe there’s about $100 million of excess inventory out there. In retrospect, after the quarter, remember when we got to the end of the quarter, we had a bunch of cancellations and we were trying to figure out what’s going on. We saw the weaker market and we still thought we ended the quarter at a $100 million excess.

When we looked back later, we said we were wrong, it was probably more than twice that. So the excess inventory at the beginning of the first quarter was higher than we thought.

As we go into this current quarter, what’s happening is our customers are indicating they want leaner inventories as they prepare for the second half. So that’s not necessarily inventory that was excess to begin with. But as they reset their inventory targets because of a weaker growth environment and preparing, clearing their deck for the newer products, there’s a further reduction they’re looking for.

So it’s kind of a combination of, we think we lost a little more share than we thought in the fourth quarter. Therefore, the inventory was a little larger than we thought. The Q4 burn off was relatively small. Customers are resetting low inventories now for the second quarter. A combination of all that is why the second quarter numbers comes out so big.

8:30 PM, May 02, 2006  
Blogger Sharikou, Ph. D said...

Isn't this a 'win-loose' situation for Intel?

When Intel CPUs are in healthy demand, Intel and DELL can play this little trick to compensate market fluctuations and make their quarterly numbers always look good -- Intel and DELL's reports are one month apart.

However, when market demand for Intel is going weaker and weaker, channel stuffing will just cause bigger and bigger problems for Intel. The logical step is to cut production and raise prices, but Intel keeps pumping out CPUs, and they pile up as inventory, this leads to collapse of pricing and revenue.

Intel now projects its 2Q06 revenue at $8.0b to $8.6b. Their Q3 will be even worse due to Osborne effect and limited availability of Conroe.

8:37 PM, May 02, 2006  
Anonymous Anonymous said...

When I saw that report, I knew you would have fun with it!

8:08 AM, May 03, 2006  

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