S a l o m o n S m i t h B a r n e y R e s e a r c h
DELL: FALL ANALYST MEETING RECAP; REITERATE BUY AND $60 TARGET
Dell Computer Corp(DELL)
Rating: 1H
10/15/1999
Salomon Smith Barney ~ October 8, 1999
10/08/99 Dell Computer (DELL $44.37,1-H,Tgt $60.00) Richard Gardner
--SUMMARY:--Dell Computer--PCs
*Dell held a very well attended analyst meeting in Austin, TX yesterday.
Most of the meeting was dedicated to a review of Dell's target markets and
its strategy for winning in these markets; we would characterize these
portions of the meeting as extremely positive.
*Mgmt also discussed the potential impact of the Taiwan quake. In opening
remarks, Michael Dell acknowledged that the company is working through some
supply issues related to Taiwan (and some unrelated to Taiwan), but said
that Dell's 3Q00 P&L would still probably not diverge significantly from
the company's prior guidance. Mgmt seems more concerned about flat panel
display and DRAM availability than about components originating in Taiwan.
*We continue to believe that there is $0.01-0.02 of risk to our 3Q00 EPS.
*Reiterate Buy (1H) rating with a $60 price target.
10/08/99 Dell Computer (DELL $44.37,1-H,Tgt $60.00) Richard Gardner
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 01/99 EPS $0.11A $0.13A $0.14A $0.16A $0.53A
Previous 01/00 EPS $0.16A $0.19A $0.20E $0.22E $0.77E
Current 01/00 EPS $0.16A $0.19A $0.20E $0.22E $0.77E
Previous 01/01 EPS $0.23E $0.25E $0.27E $0.29E $1.04E
Current 01/01 EPS $0.23E $0.25E $0.27E $0.29E $1.04E
Previous 01/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 01/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
10/08/99 Dell Computer (DELL $44.37,1-H,Tgt $60.00) Richard Gardner
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (10/7/99).....:$44.37
P/E Ratio 01/00.....:57.6x Target Price..:$60.00 Prior:No Change
P/E Ratio 01/01.....:42.7x Proj.5yr EPS Grth...:25.0%
Return on Eqty 99...:89.0% Book Value/Shr(00)..:1.29
LT Debt-to-Capital(a)N/A% Dividend............:$N/A
Revenue (00)........:24329.00mil Yield...............:N/A%
Shares Outstanding..:2784.0mil Convertible.........:No
Mkt. Capitalization.:123526.1mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
10/08/99 Dell Computer (DELL $44.37,1-H,Tgt $60.00)
--OPINION:------------------------------------------------------------------
TAIWAN, DEMAND AND COMPETITION
Chairman and CEO Michael Dell opened yesterday's meeting with comments on
Taiwan. Based on a trip to Taiwan immediately following the quake, Dell
stated that the situation was not as bad as he had expected and that the
time to recovery has been quick. Dell also opined that as a "preferred
customer" of its Taiwanese suppliers, the company is in a position to get
more than its fair share of components which may go on allocation as a
result of the quake. Dell believes that white box manufacturers,
distributors and tier-2/tier-3 manufacturers will suffer the most from
supply disruptions related to Taiwan. Dell acknowledged that there are
supply issues related to the quake, but said he believes Dell will do OK
and that 3Q00 results will probably not be significantly different from
the company's prior guidance.
During conversations with other Dell executives at the meeting, we got
the sense that Dell is more concerned about flat panel display and DRAM
availability than components produced mostly in Taiwan. Both Michael Dell
and CFO Tom Meredith indicated that Dell is more constrained by liquid
crystal display availability than by any component produced in Taiwan.
Meredith indicated that 3Q00 would be more back-end loaded than most due
to tight flat panel display and DRAM availability. The wait for a Dell
notebook at the beginning of 3Q00 was 2-3 weeks and, according to
Meredith, this wait has not diminished. Meredith indicated that liquid
crystal display and DRAM availability would continue to be issues through
the fourth quarter.
Neither Dell nor Meredith focused on graphics chips as their primary
concern. Dell's belief is that the company will be able to get sufficient
graphics chips from finished goods inventories already in the supply
chain and at the expense of smaller manufacturers and distributors.
We believe that the bill of materials for an existing PC configuration is
now rising. DRAM contract prices have doubled since early July, hard
drive prices have stabilized at certain capacity points and flat panel
display prices are rising...the only high-value component within the PC
that continues to decline in price is the microprocessor. Under such a
scenario, CFO Tom Meredith indicated that Dell would be more inclined to
reduce the DRAM configuration per system than to raise prices; we believe
that Dell has already begun this process. Our sense is that Dell is much
more concerned about component shortages (flat panel displays and DRAM)
than about their ability to manage the gross margin impact of rising
component prices.
On a more positive note, CFO Meredith cited strong overall industry
demand and indicated that Dell continues to win 55-65% of all competitive
bidding situations in large corporate accounts. We believe that Dell
continues to take significant market share from Compaq in the large
accounts market.
None of Dell's executives cited any slowing in demand as a result of Year
2000 spending freezes. Mike Lambert, Senior VP of Dell's Server and
Storage Division, said he has not seen and does not expect to see any
significant demand degradation between now and year's end as a result of
Y2K.
CONCLUSION
Following yesterday's meeting, we continue to believe that there could be
$0.01-0.02 of risk to Dell's EPS during the October quarter as a result
of Taiwan and other component constraints (DRAM, graphics chips, chip
sets). However, management's positive commentary with respect to demand
and competitive wins in large accounts lead us to believe that the risk
is purely a function of component constraints. Moreover, the strategic
initiatives outlined by Dell management during the meeting reaffirm our
belief that Dell is 1) diversifying into a number of markets that offer
significant opportunities for incremental revenue and profit growth, and
2) is pursuing these opportunities with a strategy that will allow Dell
to continue to taking market share in a consolidating market.
We reiterate our Buy rating and $60 target. We recommend that clients use
any weakness in the shares as a buying opportunity.
STRATEGIC INITIATIVE HIGHLIGHTS
The following is a summary of the main points from Dell's strategic
overview.
*Chairman and CEO Michael Dell established the backdrop for the meeting
with a discussion of Dell's Internet strategy and principal growth
opportunities. According to Dell, Dell will make use of the Internet for
three primary purposes: 1) to gain maximum supply chain efficiencies; 2)
to reduce sales and support costs; and, 3) to create the best and most
compelling "customer experience." Dell also outlined the company's four
primary growth opportunities: 1) services; 2) global expansion; 3) the
home and small business markets; and 4) servers and storage. According to
Dell, each of these four markets offers the potential for an incremental
$10B in revenue during the next several years.
*Vice Chairman Kevin Rollins followed with a discussion of Dell's
services strategy. According to Rollins, Dell's addressable services
market will be $175B by 2001 and is growing at a 14% CAGR. These services
include custom hardware and software configuration, asset tracking, IB
tracking, telephone tech support, online support, server and storage
consulting, application proof of concept, application tuning,
deployment/installation, hardware/software maintenance, lifecycle
planning and procurement/disposition. Dell intends to offer all of the
services up to and including application tuning internally while
outsourcing the rest to best-of-breed partners. In many cases, server and
storage consulting, application proof of concept and application tuning
will be outsourced to partners. Even in cases where Dell outsources the
provision of the above services to a third party, Dell will act as the
"sales agent" and single point of accountability for its customers. The
revenue and expenses associated with most of these services will flow
through Dell's income statement and should be gross margin accretive.
Moreover, given that Dell will have very little invested in personnel for
the provision of these services, they should garner a very attractive
return on invested capital. Rollins indicated that Dell's services
revenue more than doubled year to year in the most recent quarter from
$205M in 2Q99 to $429M in 2Q00.
*Vice Chairman Mort Topfer suggested that China and Brazil represent very
attractive expansion opportunities for Dell. Topfer expects China, where
Dell recently established a direct sales and manufacturing presence, to
surpass Japan as the second largest country market for PCs within the
next several years. Dell's Chinese unit shipments grew 561% yr/yr (albeit
from a very small base) during the most recent quarter. Dell has
penetrated large Chinese and multi-national corporations and is now
pushing into small and medium accounts.
*John Legere, President of Dell's Europe, Middle East and Africa business
suggested that there is nothing about the German market (the largest PC
market in Europe) which should preclude Dell from becoming a top three
player there. Legere attributed Dell's recent difficulties in the German
market to low brand visibility, heavy use of VARs and distributors, the
local strength of Siemens and low out-of-the-box quality. Legere
suggested that Dell has aggressive initiatives in place to solve all of
these problems. Legere has hired an impressive line-up in executives from
Siemens, Compaq and Sony to head Dell's German operations.
*Although Dell's worldwide consumer business continues to grow at 80%
yr/yr, Paul Bell suggested that Dell is expanding its list of target
customers within this segment. Dell is launching a new consumer
advertising campaign designed to appeal to 4 of 7 major segments that
Dell has identified within the consumer market. Dell still intends to
steer clear of the very low-end, price sensitive portion of the market.
Dell's strategy for the consumer market is to be a "Home Technology
Integrator," identifying and bringing together compelling technology
bundles that allow consumers to make maximum use of the capabilities of
their system. In the small business market, Bell suggested that Dell is
migrating high-end services such as Premier pages and DellPlus customer
hardware and software integration down to consumer customers. According
to Bell, 8,000 small businesses now have premier pages and the minumum
order quantity for DellPlus has been reduced to 1 server or 10 desktops.
*Mike Lambert, Senior VP of Dell's Enterprise Systems Group, pointed out
that Dell's U.S. server market share is now 22%, more than that of HWP
and IBM combined and second only to Compaq. Lambert highlighted the
significant growth in the Enterprise market: 22% in departmental and
workgroup servers; 32% in enterprise servers; 27% in attached storage;
52% in storage area networks; and, 43% in network attached storage.
Lambert's goal is to make Dell the Wintel provider of choice for Internet
infrastructure. In the storage market, Lambert highlighted the SAN
opportunity and suggested that the first beta sites with ConvergeNet
technology would appear in the first calendar quarter of 2000. Lambert
also suggested that Dell would bring a full compliment of server ap
pliances the market during the coming 6-12 months. Finally, Lambert
highlighted new Internet-enabled product support features designed to
offer both responsive and proactive product support and repair.
*Carl Everett, Senior VP of Dell's Personal Systems Group suggested that
in addition to performance improvements, Dell will increasingly focus on
product size, ease of Internet connectivity and industrial design.
Everett previewed a new line of consumer systems dubbed WebPC which Dell
will introduce in November. The WebPC line will feature creative
industrial designs for the consumer market.
*Finally, CFO Tom Meredith provided a detailed assessment of the economic
benefits of the direct model. According to Meredith, Dell could reduce
SG&A by 380 basis points during the next several years by pushing more
sales and support to the Internet. Meredith suggested that Dell will
continue to focus on the balanced priorities of profitability, liquidity
and growth in deciding how to use these cost savings.
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