Wednesday, November 12, 2008

More Bad News

Late today, Intel announced it was likely to come up short this quarter. By "short", they meant about $1bn. Instead of doing around $10.5bn this Q, Intel is now forecasting more like $9bn. Whilst this is still a tidy sum, it's clearly a long way off where they started out believing the Q would take them.

Why such a big change relatively late in the quarter (bearing in mind Christmas is but a few short weeks away)? The blame is being laid on manufacturers for reducing inventories and cutting future orders. This is of course a by product of the obvious signs of weak consumer spending across-the-board. In short, every element of the supply chain is bracing itself in the expectation of weak holiday sales.

Now, how much of this is driven by a true and very negative picture of the spending patterns leading up to the holidays is debatable; just as likely, companies are doing two specific things designed to protect themselves regardless of how this all plays out.

Firstly, they are of course playing safe. Better to have too few products available on the shelves, with any shortfall helping keep prices up, than to have stock left sitting on shelves that they will have to discount deeply when January rolls around

Secondly, they are ratcheting down their corporate numbers across the board, both on the spending side as well as the income side. Cutting expenses faster than any actual revenue falls means that as things do start to improve there is a real accelerating effect as to how fast those increasing sales numbers flow through as profits to the bottom line. Wall Street has already baked a lot of bad news into the stock market so there's little point in being seen as a shining star today. Much better to keep that light safe in order to glow more brightly in the future when valuations can reflect it.

There is good news in all of this though for innovators in Silicon Valley. As we saw in 2000/2001, when sales are ramping quickly, no one pays much attention to trying to be more efficient or cutting costs. Consequently, if you are selling a process improvement/more efficient kind of value proposition, it's likely easier to garner mind-share now than it was, say, six months ago.

"It's an ill wind ..." and all that.

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