You may get a better take on this on the CPQ thread (which I still have to catch up on), but here's my 2c worth.
Prior to the warning, my CPQ model projected $6.29 to $6.49 billion sales for Q1, assuming no truth to the "stuffed channel" rumors, and a guesstimate of around $6.0 billion, if they were true. That gave me EPS of about 0.36 -0.37 for the first case, and about half that for the second. I didn't expect the warning.
Flat sales with Q1 a year ago results in a $800 million to $1 billion sales shortfall, with CPQ's ASP's around $2330/unit, that translates into 340,000 - 430,000 units they will have to unload through incentives etc. With CPQ's 10.5 million units/year in sales, that's about 2 production weeks worth of product they have to move, kind of a speed bump if it's a one time thing (i.e. if they've let their production get 2 weeks ahead of demand), more serious if it's a result of DELL eating away at their market share and it's an ongoing problem.
Now CRN reported that (based on "spot checks" with CPQ's distributors) 200,000 of those units have older basic Pentium and Pentium Pro CPU's, a CPU that DELL stopped selling like last August when Pentium II's became the standard for DELL. With its manufacturing running on a sales forecast model (unlike DELL's 100% BTO), it's not hard for CPQ to get into this kind of bind. Maybe the entire CPQ surplus channel inventory that I estimated is the same old model CPU, I don't know.
What does CPQ have to do to unload these machines? IMO, they'll have to drop the price to at least an ASP of $1500 and maybe as low as $1000. As long as it's only a one time action to get the inventory down and balance supply/demand, I don't believe it will affect CPQ for very long, since they're already taking the sales revenue hit in Q1.
Will this affect DELL? Unlikely IMO, since (1) the wide spread availability of low priced CPQ machines in both the retail and business markets hasn't dented DELL's sales one iota, and (2) these appear to be mostly outdated machines CPQ is stuck with.
On the other hand, if CPQ moves aggressively to reduce prices on its present generation machines to increase market share and avoid an ongoing problem, that obviously presents a challenge to DELL. Again IMO, DELL has shown that its BTO manufacturing and absence of distributors will always give it a price advantage in any market it chooses to enter. We've seen this successively in desktops, notebooks, servers, and most recently workstations. So even in this "worse case" scenario for CPQ and the rest of the market, I don't see DELL being significantly affected. If worldwide PC demand is below expectations, you will see DELL trim its pricing to maintain its market share and growth.
Don't forget DELL's principal advantage in the PC marketplace -- with only a 7 day finished goods inventory at any point in time (all firm orders), they can adjust pricing rapidly to maintain their sales on target, whatever that target may be. IMO, that's why they consistently both meet their internal sales/growth targets, and beat analysts estimates.
Sorry for being so long winded -- it's a character fault!
David T. |
