Seems like H. Greenberg is going way out of his way to trash DELL... Wonder what his problem is???
Reality for Dell: Its Growth Is Slowing
By Herb Greenberg
Senior Columnist
5/15/00 6:30 AM ET
Here we are. It's Monday. And the Hostile React-O-Meter is still spinning outta control in reaction to Friday's Hotline -- the one that dinged Dell (DELL:Nasdaq - news - boards) (yet again) for not doing as well last quarter as Wall Street and the company made it appear.
Most of the hostility (and confusion) was directed to my breakdown of results. Dell posted first-quarter earnings of 19 cents a share. I had said that operating income (the amount the company gets from making PCs, servers and the like) was right around 16 cents for the quarter.
The rest, I noted, was from investment income (or "wampum," as longtime critic Bill Fleckenstein likes to call it). In other words, Dell only made the number.
But, according to email after email, I was wrong because First Call/Thomson Financial (that is, the analysts, as instructed by the company) had included one cent of investment income in its 16-cent estimate. Since Dell's actual operating income was 16 cents, the emailers argued, the company actually beat the street by a penny, excluding investment and other income. Which apparently means Dell's back on fire!
Why, they wondered, didn't I get it?!
Well, I didn't and don't and won't get it for two simple reasons:
First, the company didn't really beat estimates. No company can really claim that it "beat" estimates after estimates have been shaved, as was the case with Dell. (That's called lowering the bar and there's really no reason to be impressed by a one-time champion high jumper who barely clears a lowered bar.) Doesn't anybody remember that first-quarter estimates for Dell started the year at higher than 20 cents? Those estimates were lowered to 16 cents early in the year after Dell warned of weakness. I suppose you could argue that Dell really missed estimates by as much as four or five cents.
Second, it really doesn't matter whether the 16 cents did or didn't include investment income. Operating income amounted to 16 cents. That's a measly 4% gain in operating gain on a 31% increase in sales. Expenses, meanwhile, were up 48%. (Not a pretty picture.) "No matter what anybody says," argues one short, "those are the numbers," and they're worse than those of a year ago -- not better.
Dell, however, sees it differently. The way it looks at its numbers (more to the point, the way it has instructed Wall Street to look at the numbers) is that "finance and other" income amounts to one penny of foreign exchange and two cents of investment income. (Thanks for telling us, guys. You would never have known that from simply reading the press release. Companies should be required to break out investment income on a separate line, especially now that analysts are including it in their models; time was, not very long ago -- like last year! -- they never included it.)
Those numbers, however, have nothing -- I repeat, nothing -- to do with operating income, so they shouldn't be included in year-over-year comparisons. To which a Dell spokesman responded (and I'm paraphrasing), "Since when do companies calculate EPS on operating income?" Well, they don't. But when a category like "financing and other" income shoots up to $125 million (or 3 cents per share) from $20 million (half a cent per share) a year earlier, suddenly what is and is not operating income becomes relevant.
Still, the spokesman responds: "The bottom line was 19 cents. Wall Street was expecting 16 cents," and the company had a penny more than anybody was expecting from investment income. That's what the company says. That's what the analysts say. Of course that's what the analysts say because that's what the company tells them to say. (Like you expect any different from the toe-the-line crowd?!)
Now here's what one short says: "What the trained monkeys are saying is that the operating number they expected was 15 cents, and since it was 16 cents we should be rejoicing. What I'm saying is, forget what expectations are or were, the reality is that you are now long a company at 54 times this year's expected earnings that is growing operating income at 4% year over year, with expenses growing half again as fast as revenue. This beat-the-expectations game is ultimately such a loser for these chimps. This Dell quarter was the old 'set the bar low enough so the old man can clear it,' and when he clears it, we'll cheer!"
Still a fine gent (will always be respected), but hard to believe he can't jump as high as he used to. (Otherwise known as the law of large numbers. The faster they grow, the quicker they slow.)
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