DELL Analyst Meeting: 4/9/99 (Part 2, Bear Stearns)
07:31am EDT 9-Apr-99 Bear Stearns (Neff, A/Wu, S/Bean,W 212/272-4247)
DELL IBM
DELL: Upbeat Analyst Meeting; Q1 On Track; From Boxes to Systems
...
Subject: Company Update
Industry: Computers & Office Equipment
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
Dell Computer Corp. (DELL-$45) - Buy
Upbeat Analyst Meeting; Q1 On Track; From Boxes to Systems; Maintain
Buy
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*** Q1 Appears on Track. Dell hosted an upbeat analyst meeting in New
York yesterday (April 8, 1999), as we had indicated was likely in our
note earlier this week. Near-term, we walk away more comfortable with
Dell's outlook and growth and we believe Dell is on track to meet or
beat our 1Q2000 EPS estimate of $0.16 vs. $0.11 (also the First Call
average). For the quarter, we are looking for 38% Y/Y revenue growth
to $5.4 billion (on top of 46% unit growth) led by good growth in all
geographies, all products, and customer segments. We are maintaining
our estimates for FY2000 (January) at $0.73 and for FY2001 at $1.00.
Looking ahead, we expect to see continued above-average growth fueled
by multiple engines of growth in international markets, services,
Internet, consumer PCs, enterprise systems and storage. From a broader
perspective, Dell is taking steps to expand its services business to
leverage the advantages of its direct model, while its indirect
competitors are trying to restructure their channels.
*** Favorable Industry Outlook. Management was also optimisticabout
demand trends in all geographies and product segments,noting that recent
concerns about demand patterns reflect typicalinvestor anxiety in
reaction to seasonal patterns, a view withwhich we would concur. This
seasonality may also have beenexaggerated by the product transition from
Pentium II to PentiumIII, which may have led to a pause in
January/February, as wehave discussed before. The company also talked
about its viewthat Y2K issues could lead to slower growth from large
corporatein the second half, but this could be offset by
acceleratedspending by small and medium business, government and
international spending.
*** Dell On Deck. Michael Dell will be one of our keynotespeakers at
the Bear Stearns "Virtual Computer Conference,"scheduled to take place
the afternoon of Monday, June 14 and themorning of Tuesday, June 15 as a
lead-in to the 1999 Bear StearnsTechnology Conference, which takes place
at the Grand Hyatt NewYork June 15-17. Other keynotes in this "Virtual
ComputerConference" include Scott McNealy, CEO, Sun Microsystems;
EckhardPfeiffer, CEO, Compaq Computer; Lew Platt, CEO,
Hewlett-Packardand Mike Ruettgers, CEO, EMC Corporation. Contact
yoursalesperson for details or call the Bear Stearns Conference Lineat
212-272-9386.
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Shares outstanding: 2,750 million Market cap: $123.8billion
EARNINGS/ Q1 Q2 Q3 Q4
Apr Jul Oct
Jan Year P/E
Current 1999 $0.11A $0.12A $0.14A $0.15A $0.53A 84.9x
Current 2000 $0.16E $0.17E $0.19E $0.21E $0.73E 61.6x
Current 2001 $0.22E $0.23E $0.25E $0.30E $1.00E 45.0x
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*** From Boxes to Systems. We believe that Dell is on track
transitioning from a "box company" to that of a "computer systems
company" which mitigates the impact of declining average selling
prices. Why do we say this? The company disclosed today - for the
first time - that $1.4-$2.0 billion, or 8-11% of Dell's $18.2 billion in
revenues in 1998 were computer services revenue - by way of comparison
Compaq, Sun and H-P all derive around 15% of their revenues from
services. Today, Dell participates in "low-end" services businesses
including basic installation, tech support, customer configuration,
extended warranties, and asset tagging/asset management services;
however, the company is taking initiatives to adding more "high-end"
consulting capability with the development of "Dell Technology
Consulting" and enhanced partnerships with EDS, Andersen Consulting, and
KPMG. We also believe that we could see an expanded partnership in this
area with IBM; others speculate that Dell will out-source IBM's PC
business. It is clear that there is potential for further expansion of
the relationship with IBM where it would be mutually beneficial.
*** Plenty of Headroom. We believe Dell has huge growth opportunities
in the years ahead as the company only has 9% global market share,
expands its direct model through Internet initiatives (gigabuys.com,
lower costs via Internet services and support, affiliates program
through LinkShare and Amazon.com), broadens its services offerings
(only 8-11% of revenues), grows its enterprise business (currently only
13% of revenues), grows its consumer business (only 16% of revenues vs.
industry's 30%), and maintain its growth leadership in its core PC
business (desktops and notebooks).
*** Maintain Buy. We continue to rate Dell shares a Buy as we still
believe the company will continue to execution on its three- pronged
strategy of liquidity, profitability, and growth. In a sense, our
thesis is that Dell's management and direct model should translate into
continued high rates of earnings growth and that we view the 4Q99
shortfall as a "bump" in the road which has limited near-term multiple
expansion. We expect to see this growth from servers, notebooks,
storage, international and internet as well as other new opportunities, such as an expanded Dell on-line store and increased consumer effort.
Our primary concerns relate to stock market risk, owing to its high
multiple, and execution risk, although this latter issue has generally been offset by its multiple growth engines.
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