As an investment analyst and investor, I sometimes feel "weird" critiquing, criticizing, and dissecting the management teams of the companies that I write about and, more importantly, invest in. However, the truth of the matter is that the management team is what makes - or breaks - a company, and getting a read on the management team is vital as part of due diligence for any stock.
Indeed, I'd like to let you in on a little secret. Finding untrustworthy management teams that try to mislead, deceive, and exaggerate is the secret to making a killing as a short seller. Many of my readers will remember that while the sell side was out parading Violin Memory (VMEM) post-IPO, I was one of the few - if only - public voices that was saying to short this name (and doing so made me and my readers a small fortune).
But why did I short the name? Simple. I saw an interview with (now former) CEO Don Basille and could tell within the first minute that he could not be trusted. This led me to do further due diligence, and what I found was shocking: a highly overpaid CEO who consistently overstated the company's competitive position and the market opportunity. In short, while the business itself was lousy, it had no hope with this guy at the top (and the company's board agreed with me - he's out).
So, what does this have to do with Intel (INTC)? Everything. I now have a "read" on Intel's new CEO Brian Krzanich, and would like to share my thoughts with the investment community.
He's A Straight Shooter
Right off the bat, I can tell that Mr. Krzanich is a no-BS honest person. On his first conference call as CEO, he came clean about the issues that the company was having with its 14 nanometer manufacturing process - even though the negatively-slanted Intel press/bloggers had a field day with it. Doing it back in October rather than waiting for the Investor Meeting or - gasp! - for 2014 to roll around was the right decision.
Further, in a recent interview with Re/Code, Krzanich was, once again, completely forthright about the problems that Intel faces. In particular, I'd like to draw your attention to the following snippets:
"The phone space is tough because it is consolidated," he said, noting that Apple and Samsung get 80 percent of the profits from the entire handset market. "If you really want to make inroads in [smartphones], you need to win one of the two big guys."
"There are still a lot of things that slow us down-how we make decisions, the number of people who feel like they have to have a say," Krzanich said. "Those things get in our way sometimes."
It's good to see that Mr. Krzanich realizes that the company has been moving too slowly (particularly on the mobile chip design and software side of things - the manufacturing guys are on point). Further, it's good to see Krzanich accepting the reality that Intel will need to win business over at Apple (AAPL) and/or Samsung (OTC:SSNLF) if it is to really bring home the bacon in smartphones.
Anyway, so Krzanich passes the "honesty" test. Just like his predecessor, Paul Otellini, I can trust what he has to say. However, this is a necessary but insufficient requirement for a "good" CEO.
Is Krzanich The Right Man For The Job?
People seem to forget that, at the end of the day, Krzanich is the CEO of a company that sells components, not end-user devices. So, whenever somebody tells me that "it's not about the best widget", I can't help but chuckle. Intel's business model can be summed up as follows:
- Design and build processors that offer the best performance and functionality for the dollar (at a competitive cost structure)
Now, this may seem as simple as eating dirt for gross margins by over-designing your chip while selling for cheap prices, it's actually much more nuanced than that. It's all about having the best designs from both a performance/power/integration standpoint and being able to sell them for the same prices as the other guys (while having lower manufacturing costs).
I don't think that many investors grasp just why Intel won the "RISC v.s. CISC" wars back in the 90s, nor do I think that these investors understand why AMD is in such hot water. In the PC space, Intel builds better-performing and more power-efficient products than AMD does, all while having a significantly lower cost of manufacturing. Part of this cost advantage is driven by the fact that it does its manufacturing in-house (so it "keeps" the foundry margin), but an even bigger part of this is due to the fact that Intel's manufacturing technology is at least a full generation ahead of what AMD is using for its high-performance CPUs.
Intel's goal needs to be to do to Qualcomm (QCOM) and Samsung's in-house chip teams exactly what it did to IBM, Oracle, AMD, and others in the server and (in the case of AMD) the consumer space: sell the best chips for the money, while maintaining a superior cost structure.
I think Krzanich understands this. The good news is that the manufacturing technology has been in place and continues to accelerate to achieve these goals for mobile computing. The bad news is that Intel hasn't been executing all that well on the SoC design/integration side of things. A super-duper manufacturing process is worthless if you:
- Still haven't ported your cellular modem and connectivity IP to it
- Don't have leadership performance/watt across all IP blocks (imaging, graphics, etc.)
- Don't get your designs out during the correct competitive time-frame
Pre-22nm/Bay Trail, Intel's mobile designs were junk (outdated CPU, GPU, adequate imaging but not stellar, no integrated modem, bloated die size, low memory bandwidth, etc.). Bay Trail, while not perfect (no integrated modem/connectivity, less-than-leadership GPU), had leadership in CPU-intensive tasks and had solid memory bandwidth and imaging capabilities.
However, the big issue with Bay Trail is that it was out later than expected (and Android support), and Qualcomm will leap-frog Bay Trail with its Snapdragon 805 (although the currently-available 800 is already faster in graphics and close in CPU performance). Is this a problem with Intel's 22nm manufacturing process? No! The design teams screwed up, from the product definition guys to the teams tasked with implementing the chip to the teams responsible for the software.
None of Intel's failings at 22 nanometer had to do with the underlying semiconductor technology and everything had to do with a bad internal design methodology, a complete underestimation of the competition, and a poor understanding - at the full SoC level - of what the market actually wanted.
Will Krzanich be able to fix this? I think he, at the very least, recognizes that this is a very serious issue within Intel, and after seeing Intel Architecture GM Dadi Perlmutter replaced by Krzanich himself (the architecture problems do, after all, fall on Perlmutter), it's clear that Krzanich is cleaning house and re-organizing in a big way.
Under Otellini, Intel didn't transition quickly enough into a system-on-chip company with strength in comms/connectivity. However, that transition is nearing completion and by 2015, I expect Intel to have products that not only "win", but - at least beginning at the high end - will also be sold profitably to the most important customers.
However, if Intel fails to deliver on those 2015 products and we're yet again talking about how the 10 nanometer generation will be the one to *really* get Intel into the game, then it'll seriously be time to question whether this is an organization that has what it takes to succeed as a chip company in today's world.