To the board...
In trying to analyze Compaq's income stream, I'm looking for the breakout of their product sales that come from the DEC acquisition. Specifically, I think that would be their Alpha servers. Here's my point:
Looking at the robust revenue numbers from December, I tried to break them down into DEC product sales, CPQ product sales, and services. From CPQ comments and other company comments, and the IDC press release, I tried to extrapolate the most at risk segment of revenue. Obviously the SMB pc sales.
If we agree that Service Revenue will grow sequentially 4Q to 1Q, that would provide a base of 1.9 billion in revenue (sequential growth of $200 million, matching the 3Q vs 4Q dollar growth). Additionally, what about the impact of DEC product sales. These would seem to be, by definition, not materially influenced by the SMB slowdown. Rough estimate of this segment is 1.8 billion (my guess/analysis March 97 DEC product sales * 4.9%). In this scenario, PC sales must make up 6.1 billion in order to meet the 9.6 billion target. Is that doable? It should be. Based on IDC's estimate of 4.9% dollar growth 98 vs 99, Compaq would do 5.97 billion in 1 Q 99 vs 98, with no increased market share factored in. This totals to 9.67 billion for 1Q.
Now, at 9.7 billion, can they really make $.30+. Lets look at the fixed costs of overhead and R&D. $1.939 billion in 4Q, down $90 million from 3Q. They absolutely must lower this number. Assuming a mild reduction, lets say $1.894 billion for 1Q99. Total Gross Margin for 3Q was 24.8% and 4Q was 26.4%. Product GM was 23.5% and 25.5%, respectively. Service Margin was 31.4% and 31.1% respectively. Using GM of 23.5% for products (reflecting 3Q level, as to not overstate the efficiencies earned on greater volume in 4Q) and 31.1% for services reflecting the tighter 4Q margin, total GM $ would be $2.417 billion. GM less $1.894 billion overhead is .523 billion pre-tax.
Now, who knows what kind of tax rate CPQ will use. Had they been consistent 3Q vs 4Q, 4Q earnings would have been $.05 less than stated. Anyway, CPQ has to make .539 billion AFTER-TAX in order to hit $0.30. In order to hit $0.30 at the 4Q tax rate of 18.669%, EBT has to be .663 billion. In my analysis, they are .14 billion short.
However, I would expect additional overhead savings, as I believe certain sequential overhead savings realized from 3Q to 4Q are masked by the tremendous volume of 4Q sales.
In final analysis, I hope that this shows one thing. Compaq's current model is heavily revenue dependant. It is very logical to think that the company really doesn't know what kind of quarter they are having. Between 9 billion and 10 billion, every dollar counts towards covering their fixed costs. The 4Q windfall was due to eclipsing the 10 billion mark, thus generating incredible GM and also the reduced tax rate.
Just a simple analysis.........my2centz |
