Details of the report are interesting as well. I haven't seen them
posted, so here they are...
Ian.
++++++++++++++++++++
--OPINION:------------------------------------------------------------------
REVIEW OF QUARTERLY RESULTS
REVENUE
Revenue of $6.14B (up 11% qtr/qtr and 42% yr/yr) exceeded our estimate of
$6.0B (up 8% qtr/qtr and 38% yr/yr).
------------------------------------------------------------------------
Summary of Results Actual Expected Year Ago Prior Qtr
------------------------------------------------------------------------
Revenue $6,142,000 $5,968,673 $4,331,000 $5,537,000
Rev Growth (Yr/Yr) 42% 38% 54% 41%
Gross Margin 22.0% 21.5% 22.7% 21.5%
SG&A 9.3% 9.2% 10.1% 9.2%
Net Income $507,000 $470,477 $346,000 $434,000
Diluted EPS $0.19 $0.17 $0.12 $0.16
------------------------------------------------------------------------
On a geographic basis, revenue growth was 47% yr/yr in the Americas, 26%
yr/yr in Europe and 52% yr/yr in Asia.
------------------------------------------------------------------------
Yr to Yr Revenue Growth Current Quarter Prior Quarter
------------------------------------------------------------------------
North America 47% 45%
Europe 26% 29%
Asia 52% 48%
------------------------------------------------------------------------
Total 42% 41%
------------------------------------------------------------------------
GROSS MARGIN
Gross Margin of 22.0% exceeded our estimate of 21.5% and increased 50
basis points sequentially. Management attributed the higher gross margin
to lower component pricing and the usual shift in product mix.
EARNINGS PER SHARE
2Q00 diluted EPS were $0.19, several pennies above our estimate and the
consensus of $0.17.
UNIT SHIPMENTS
Unit shipment growth was strong across all product categories with
portable unit shipments increasing 67% yr/yr (vs. our estimate of 58%).
Desktop shipment growth was well above our expectations at 50%.
Enterprise units grew approximately 85% yr/yr (vs. our estimate of 72%),
with server unit shipments increasing 75% yr/yr and workstation unit
shipments increasing 108% yr/yr.
Management cited over 100% yr/yr growth in the Consumer segment of its
business, with combined Consumer and Small to Mid-size Business (SMB)
revenue growing 67% yr/yr and comprising 30% of total revenue in the
quarter.
------------------------------------------------------------------------
Yr to Yr Unit Growth Actual Expected Prior Qtr 6 Qtr Range
------------------------------------------------------------------------
Server 75% 64% 75% 57% - 131%
Workstation* 108% 92% 115% n/a
Desktop 51% 53% 48% 48% - 62%
Portable 67% 58% 64% 64% - 141%
------------------------------------------------------------------------
Total 55% 55% 52% 52% - 74%
------------------------------------------------------------------------
* Dell did not sell any workstations prior to 3Q98
------------------------------------------------------------------------
ASP Actual Expected Year Ago Prior Quarter
------------------------------------------------------------------------
Overall $2,194 $2,201 $2,399 $2,307
Notebook $2,789 $2,880 $3,118 $2,883
Desktop $1,563 $1,575 $1,871 $1,656
------------------------------------------------------------------------
THE BALANCE SHEET
Inventory turns remained flat sequentially at 62 days, or 5.9 days of
inventory. Days sales outstanding increased by one day to 36 and days of
payables increased by four days to 57. Dell achieved a cash conversion
cycle of -15 days, generating $930M in cash flow from operations. Dell
used $240M in cash for share buy-back in the quarter.
------------------------------------------------------------------------
Asset Management Metrics Actual Expected Prior Qtr
------------------------------------------------------------------------
Inventory Turns 62.0 62.0 61.9
Days of Inventory 5.9 5.9 5.9
Days Sales Outstanding 36.0 35.0 35.0
Days of Payables 57.0 52.9 53.0
Cash Conversion Cycle -15 -12 -12
------------------------------------------------------------------------
UPGRADING FROM NEUTRAL (3H) RATING TO BUY (1H) RATING
We are upgrading Dell shares from Neutral to Buy this morning with a
revised price target of $60.
For several quarters, we have been concerned about declining prices and
increasing competitive pressures within Dell's core large accounts market
(50% of total revenue). In response to these difficult industry
conditions, Dell has actively sought to diversify into new customer,
geographic, and product areas. We have commented that there would be an
inflection point sometime during the next 2 to 3 quarters at which time
Dell had sufficiently ramped these new initiatives to reduce or eliminate
earnings risk.
Evidence of success with these diversification efforts abounds. Dell's
consumer and small to mid-size business revenue increased an impressive
80% yr/yr during the July quarter. Revenue from China increased 35%
sequentially and drove overall APAC revenue growth of 52% yr/yr. As a
result of these diversification efforts, Dell's total unit shipments grew
an amazing 55% yr/yr, which represents an acceleration over prior two
quarters' growth rates (from a larger base!).
At least one of Dell's large indirect competitors has failed to
effectively respond to Dell's incursion into its important large
accounts. In fact, with the exception of IBM, Dell's indirect
competitors have not been able to achieve comparable components inventory
turns or to significantly reduce channel inventory levels. As a result,
Dell remains the undisputed cost leader in the PC market worldwide.
Compaq, in particular, has presented Dell with significant near-term
market share opportunities. While we believe that Compaq understands the
necessary path toward a more cost competitive manufacturing and
fulfillment model, we believe that programs such as Distributor Alliance
create near-term risk for Compaq and even more near-term opportunity for
Dell. Moreover, we believe that it will take Compaq 9-12 months to
achieve more competitive components inventory turns within its PC
business.
Finally, Dell continues to up the ante in the PC market by migrating a
greater percentage of sales and technical support to the internet. Not
only does this allow Dell to reduce SG&A expenses, it also makes
purchasing from Dell more convenient and therefore creates some level of
switching cost for large accounts customers.
In addition to Dell's flawless execution and the inability of competitors
to formulate an effective response, we also see other stabilizing revenue
and profit streams entering Dell's mix during the next several quarters.
For example, several quarter ago Dell introduced GigaBuys, an e-commerce
website featuring 20-30,000 third party peripherals and software
packages. Not only does this represent a purely additive opportunity for
Dell, management has confirmed that gross margins on these sales are
in-line with the corporate average of 21-22% (well above our
expectations). GigaBuys is also an attractive program from a return on
invested capital perspective given that Dell leverages the back-end
fulfillment capability of several major wholesale distributors; in other
words, Dell has zero fixed capital and negative working capital invested
in the GigaBuys program.
Dell's recently announced Internet service initiatives, Dellnet and
Dellnet.com also represent significant opportunities. The average
selling price of a Dell consumer desktop is already higher than that of a
corporate desktop. With the addition of internet service charges, Dell
should be able to maintain relatively stable consumer average selling
prices even as it increases its presence at the low-end of the market.
The creation of the Dellnet.com portal also positions Dell to capture
e-commerce and advertising revenue related to ISP customers in the future.
Net, net, the combination of successful diversification, an anemic
response by Dell's major indirect competitors and new revenue and profit
opportunities make us comfortable with Dell's ability to meet or exceed
consensus expectations going forward. While we continue to believe that
Year 2000 may negatively impact demand in the large corporate segment of
the U.S. PC market during 4Q99, we believe that the opportunities
outlined above will completely offset the impact on Dell's revenue and
earnings.
RAISING ESTIMATES
We are raising our unit shipment and revenue estimates for the remainder
of C1999 and all of C2000 to reflect the impeccable execution of Dell's
diversification strategy. We now believe that Dell can grow total unit
shipments 53% and 52% during the next two quarters. Given our belief
that Dell will experience a greater degree of average selling price
stability during the next several quarters, these unit growth assumptions
yield revenue growth of 41% and 43% respectively.
With respect to gross margins, we expect a decline during the next
several quarters due to a slowing in the rate of component price
declines. However, our gross margin assumptions merely imply a return to
the 1Q00 level of 21.5%.
We are raising our 3Q00 earnings estimates from $0.19 to $0.20, and our
4Q00 estimates from $0.20 to $0.22. Our estimates for F2001 are also
increasing from $0.89 to $1.03.
VALUATION
Given the significant increase in earnings visibility and likely upward
revisions in Street ratings and price targets this morning, we expect
Dell shares to experience multiple expansion from the current level of
45x forward 12 EPS back to the 50-55x range. While 55x represents a peak
valuation for Dell shares (excluding the brief stint at 75x at the
beginning of 1999), we believe that results like those announced
yesterday will spark renewed interest by momentum investors in Dell's
shares. Moreover, given Dell's consistent execution and stellar 256%
return on invested capital, we believe that Dell shares deserve to trade
at a significant premium to the market.
Our $60 price target is based on a 50x multiple to our forward 12 EPS
estimates 12 months in the future ($1.20).
|
