Intel was expected to have a tough quarter, but its management messaging issues weren’t

Summary: The fact that Intel had a weak quarter isn’t all that surprising. What is surprising is the extent to which management seems to have no idea how to communicate its plans.

Last week, we reported on a series of negative news stories about Intel: processor failures affecting more chips than originally expected, a warranty extension to satisfy current owners of those chips, performance issues with the latest mobile processor models, the possibility of a class action lawsuit, and an announcement of job cuts. In retrospect, all of this seemed like a prelude to the stock’s decline that came Friday, when the company reported its latest quarterly results.

Intel reported its second-quarter results, and the numbers weren’t great. Revenue of $12.8 billion missed the consensus estimate of $12.9 billion, and EPS of $0.02 was well below the $0.10 estimate. Guidance was even worse, with third-quarter revenue expected to be between $12.5 billion and $13.5 billion, below the consensus estimate of $14.3 billion, and a loss per share expected of ($0.03), compared to the consensus estimate of $0.31.

It’s hard to fathom how bad these numbers are, although the stock’s more than 20% sell-off on Friday provides a succinct summary. The earnings conference call didn’t help either. To put it diplomatically, management’s comments and Q&A didn’t help matters.

These numbers may not surprise you. A few months ago, we indicated that this year would be a very difficult one for Intel. The company’s future depends on turning around its manufacturing process, but we won’t see that reflected in the numbers until late 2025. Until then, Intel’s products will struggle to stay afloat financially.

The company says it didn’t lose share in its core markets this quarter, but instead cut prices sharply to maintain that share. Additionally, the move to new in-house manufacturing processes (which always impacts gross margins) and more products manufactured by TSMC led to the margin crunch we’re seeing now. And maybe now isn’t the right time to mention that TSMC is raising prices…

So none of these results are surprising, but what is surprising is the amount of uncertainty management injected into the process. Both their prepared remarks and their responses reflect the gnawing cultural issues that we believe have always been at the heart of Intel’s problems. The biggest problem the analysts ran into on the call was the company’s reluctance to admit that it had made mistakes along the way.

For example, in response to this quarter’s results, the company is implementing drastic operating cost reductions, including a 15% reduction in its (already reduced) workforce. It is also lowering its capital expenditure plans for the year. However, the company has insisted that these cuts will not negatively impact its growth prospects. It has repeatedly identified cost savings across its operations that it is now implementing. But it can’t have everything.

Cutting costs today must have an impact on time to market and production. The company largely maintains that it does not. The question is why they did not make these cuts earlier. Either the cuts will affect their prospects or they should have made the cuts as part of their turnaround plan a year ago.

Earlier this year, the company held an analyst event to unveil its Foundry unit, but then took three months to unveil the financials for the company. We interpreted that as a miscommunication, as the company simply assumed its technology would impress everyone enough that the financials would be a secondary consideration. And here we are four months later with another shoe drop.

A truism in communication is to lump together all the bad news; spreading it out over time increases the pain of its impact. We understand that Intel had reasons beyond its control about the timing of some of these items, but so many consistent missteps reinforce the impression that they don’t understand how to communicate their changes. More disturbingly, they seem to have lost touch with the market.

In the last quarter, we noticed that management was risking its credibility:

Credibility is the most important thing now, more important than growth, more important than technology… we worry that the history and culture of the company might get in the way of it (rebuilding that credibility). The company still has some of the bad habits it developed as a market leader. The most important of them is the assumption that investors believe its comments about the market.

A year ago we wrote that “Intel may have turned a corner,” and nearly every financial release since then has proven that prediction wrong.

To be clear, we think the company has a problem with the message, not the business. We think they are doing everything they need to do to run the company. To us, the biggest risk in these recent results is that management loses its nerve and changes course. That would be a colossal mistake. That said, the management team needs to take very serious steps to change their perception among investors.

Six years ago, we wrote about Intel’s potential to go private. In that article, we suggested that the primary benefit of going private would be the ability to make sweeping changes without the constant scrutiny of public markets. While we no longer agree with the financial motivations behind that post, we think the sentiment about the attention from the street remains. Intel has at least another 18 months—six quarters—of tough times ahead of it. We still believe they can achieve that change, but they need to radically improve the way they communicate with the market.