Lucretius,
You are quite correct to point to operating earnings rather than bottom line earnings, but if you do so you ought to compare that to operating earnings for the base period. Excluding purchased R&D (that ubiquitous "one-time" expense), pre-tax operating earnings stood at $650MM, down from $694 MM in the prior period, but up from the prior year's $539 MM. Not a pretty picture to be sure. But, the real question to be asked in this context is why.
The company has argued that the reason is increased component costs. Given the fact that Dell has the best business model among box-makers we can generate two scenarios:
The first, DRAM and component costs will stabilize at higher levels. That possibility will impact the entire industry and will either lead to higher box prices, or it will put increasing pressure on the competition and force the hand of weaker players. There is considerable evidence that a decision time is near for IBM (which has decided to pull the Aptiva line from retail shelves) and HWP.
The second is that DRAM prices will fall, and that implies that operating profits will rise.
You also noted that A/R rose significantly faster than sales. Under ordinary circumstances one might argue that channels were being stuffed. But owing to the lack of channels in Dell's business model, this explanation is absurd. A more logical explanation might be an increase in sales following the Taiwan earthquake because of a fear of disruption of the supply of boxes. Alternatively, there might be an increase in orders in anticipation of an increase in prices.
TTFN,
CTC |
