(following article from Monday, 17 August, PRIOR TO earnings release)
Earnings may tell how Dell's edge is holding
By Jerry Mahoney
American-Statesman Staff
Round Rock - Mindful of disappointing profits by top computer companies so far this year, Wall Street will look for signs of weakness at Dell Computer Corp. on Tuesday, when the maverick PC maker reports second-quarter results.
After all, Dell's success painfully underscored the inventory problems that forced industry leader Compaq Computer Corp. to slash PC prices beginning late last year. IBM Corp. and Hewlett-Packard Inc. were forced to follow suit or risk losing market share.
While analysts and Dell's competitors alike acknowledge that the Round Rock-based company forced the industry to change the way it markets, sells, and manufactures computers, there is suspicion among some investors that the advantage Dell derived from its direct-to-the-customer system has run its course.
"Compaq is starting to underprice Dell in corporate desktop PCs," said James Poyner of CIBC Oppenheimer in New York. "Compaq doesn't like the term 'price war' but there is a price war going on."
A key difference between this price-cutting and previous rounds is that Compaq is now offering machines that are comparable to Dell's, Poyner said. In the past, Compaq slashed prices on older models that were gathering dust in warehouses.
Dell, meanwhile, offered the latest technology because it doesn't assemble computers until they are ordered and paid for. That avoided inventory build-up
Compaq said this month that it had reached its goal of reducing its inventory to less than a four-week supply.
Cody Acree of Southwest Securities in Dallas and Poyer said that analysts will be looking for a drop in Dell's shipments or in its gross profit margin, which Dell has maintained in a narrow range of 21.5 percent to 22.5 percent for nine quarters.
That indicator, which is the difference between revenue and the cost of sale, comes under pressure when companies lower prices to maintain market share. Companies in a severely competitive market that choose to maintain profit margins generally sacrifice market share.
Analysts doubt that Dell can sustain its gross margins while increasing its market share in such a competitive environment.
"Dell has raised the (bar) so far on its solid performance, they have to grow while maintaining margins," Acree said.
Dell officials, who are observing a 'quiet period' preceding their earnings release, have acknowledged the company must continually hone its direct system to stay ahead of competitors. Last month, for example, it launched an interactive, Web-based program that allows small businesses and Dell salespeople to discuss Dell's products.
It works something like a teleconference. Employees of the customer can sit at their computers at various sites and talk to a salesperson, while products are demonstrated, configured and priced on the screen. Dell believes it is the only major PC company to offer such services.
But it is services of a different magnitude that, Poyner and other analysts believe, represent a threat to Dell. The major computer companies offer the largest customers around the globe a wide range of products and the promise to design, install and maintain the vast systems.
IBM and HP have built such operation over many years. IBM, in fact, said last month that its service revenues soared 22 percent in the second quarter to $5.6 billion. That helped offset a 13 percent drop in hardware sales.
Compaq is increasingly able to subsidize price cuts on computers because it now has billions of dollars in steady revenue from the lucrative service business that Digital Equipment Corp. built, Poyner said. Compaq acquired DEC, whose service revenues exceed $6 billion, this summer.
"It's a shrewd strategy on Compaq's part," he said.
Dell, which has been under pressure from some analysts to follow Compaq's lead in acquiring a computer-services company, has so far chose to stay focused on PCs, while leaving other companies to provide the services to large customers.
It's hard to criticize the results.
The company has had 17 [now 18] straight quarters of record growth of revenue, including a 52 percent gain in the first quarter to $3.9 billion. Income climbed 63 percent to $429 million.
End of Article
(Note article taken from Austin American-Statesman, Monday, August 17, 1998, Tech Monday section, page D1. Retyped by poster, who also added bold for emphasis.)
|
