John -
In 4Q97, CPQ moved from an average of 10 weeks of inventory in the channel to almost 18 weeks. Now THAT's stuffing. The 4Q97 sales figures were probably twice what they ought to have been. That was Roel Pieper's contribution to my retirement fund.
In 4Q98, CPQ moved from maybe 3 weeks inventory to about 5 weeks. Some would say from 4 weeks of inventory to 6 weeks. The cardinal sin in the Xmas season is to run out of product because there is just no way to move stuff around quickly. So a 2 week increase might show up as stuffing, but I agree with Chuz - it was probably just incompetent forecasting, since many distributors ended up with shortages of key products and excess of others.
Price protection for product in the channel was as long as 26 weeks in 1997. in 4Q99 it was only 4 weeks on average. So distributors had much less incentive to take extra product and a lot more incentive to send it back ASAP if it didn't move. That may well have contributed to the weak January, but that is a completely different issue than channel stuffing.
Another aspect of the equation that seems to have completely escaped Jim Kelley and many of the analyst community as well, is that in 1997, 90% of CPQ's revenue was generated through the channel. In 4Q98 it was less than 50%. None of CPQ's high end products are sold through the channel. Services are not sold through the channel. So the impact of stuffing the channel, even if it occurred, would have been cut in half.
So in answer to your question about how we read the tea leaves of management behavior, they would have known in mid-january how much Xmas product was on its way back. That probably is what prompted Mason's comments. But the hard limits on channel inventory mean that they no longer have the luxury of controlling sales into the channel, so they really did not know how much would sell until it actually sold. In past years they just would have worked a deal to move the product and pick up the pieces down the road, but that would have been impossible given the current rules of engagement with the channel in '99.
BTW I don't believe DELL has taken much share from CPQ - I think it was mostly from IBM and some from HP. DELL has been sucking wind in small-medium business and is about number 8 in that segment. DELL's execution in corporate desktops is near perfect, but 4Q98 figures show they lost share in that segment to CPQ. Mindless boosterism is not a good investment guideline. I know you are a thoughtful investor so I would refer you to the 4Q98 IDC and dataquest results which do not support the notion of DELL taking share from CPQ. |
