> SG Cowen
> Dell Computer (DELL - $41) Richard Chu, 7/26/99
> Rating: 1/Strong Buy
> RECENT PULLBACK BUYING OPPORTUNITY; REITERATE STRONG BUY
> EPS (FY Jan) Quarterly EPS
>
> Jan New Old P/E* Q1 Q2 Q3 Q4
> F98/C97 0.32 0.07 0.08 0.09 0.10
> F99E/C98 0.53 0.11 0.13 0.14 0.16A
> F00E/C99 0.75 54X 0.16A 0.17 0.20 0.22
> F01E/C00 1.00 41X
> F02E/C01 1.35 30X
> 2.73 Billion shares; $113 Billion Mkt. Cap.; TTM Revs. =
> $19.8Billion
> Key Points:
> 1. Dell's customer acquisition/retention strategies should drive far
> better than feared ARP's and margins. even as investors grapple with
> pandora's box of "free PCs" and ISP bundles,
> 2. We think there is upside to our $6B (+39%)/17c estimate for Q2 -
> likely better than 50% unit growth with very modest ARP erosion and
> increased contribution from non-systems drivers.
> 3. Recent dip a buying opportunity; maintain strong buy for $55 target
> 4. Triggers up ahead: Dell-branded ISP rollout this week; Q2 report,
> 8/17; Analyst meeting, October.
> Investment Thesis - There is little question in our mind that Dell's
> already formidable competitive business advantage stemming from its
> well-honed direct model, if anything, looms even more potent in the
> internet environment, both from a customer acquisition and retention
> perspective. In contrast, for major indirect players, this transition
> still looms as a non-trivial challenge. Coming weeks should add clarity
> to Dell's ISP strategy, milestones on enterprise and services initiatives,
> and proof points on execution in Europe.
> 1. HIGH GROWTH DRIVEN BY UNIQUE CUSTOMER ACQUISTION AND RETENTION
> STRATEGIES WILL CONTINUE - In this current environment of understandable
> concern regarding broad-based commoditization of boxes (and, at the same
> time, narrow-band access), it is easy to tempting to move to the sidelines
> until the dust settles. As Dell gets ready to close Q2 for a report on
> the 17th of August, we think it makes sense to keep the following in mind:
>
> * Corporate relationship business - Some 85% of its business is
> non-consumer, and perhaps 60%+ of this comes from medium/large corporate
> accounts. We expect Dell to continue to gain share in this space even as
> it broadens its share of the IT wallet. Short term, Dell turned up the
> dials six months ago and win rates have turned up commensurately into the
> mid 60's, of late. It's worth keeping in midn that there is significant
> opportunity to leverage brand and relationship selling into increased
> revenue realizations at the point of sale and in the aftermarket (into
> installed accounts); we reasoned in our note of 6/17th that if Dell were
> able to extract just $100/annually in non-systems revenue (after market)
> from each installed unit, it could drive a $6+ billion revenue stream in 3
> years. This is clearly plausible as it extends its tentacles of products
> and services for the corporate arena to span peripherals, add-ons,
> installation, support, consulting, etc.; additionally, this same portfolio
> can drive revenues at the point-of-sale (the classic "upsell"); the
> addition of productized services SKU's such as the Optiplex CareFree
> package represent major recent initiatives.
> * Home/consumer business - The frenzy surrounding free PCs and ISP
> bundles should not defocus investors from the opportunity for the direct
> vendors in this space. The Gateway report from last week made it very
> clear that despite $899 entry price points, effective ASP's were higher
> (by some $200+/unit, in the case of GTW) with non-systems revenue items
> (financing, ISP, peripherals, etc.) driving over 10% of the profit stream.
> Dell has already had pointed to the fact that non-systems items
> contributed 38% of the gross margin dollars in its consumer Dimension
> transactions (up from 31% a year ago); the inclusion of an ISP component
> in the future, in addition to the development of e-commerce via
> Gigabuys.com will tend to drive these ratios up further in the future. We
> continue to believe that consumers susceptible to the "free PC" lures are
> demographically less interesting (narrrow band lock-in as industry moves
> to broad band) than consumers targeted by e.g., the Dell direct model. We
> expect, as previously discussed, that Dell will roll out its own branded
> Dell.net access as an option to complement its current ConnectDirect
> portfolio (this would contrast, e.g., with Gateway, which only offers
> Gateway.net); presumably, with Dell running some 2 million unit annual
> rate in the consumer Dimension space, and growing 80%+ Y/Y, even a 50%
> attach rate on Dell.net (already rolled out in Europe), would drive a
> customer base of some 1 million within a year, competitive with the
> current breed of top tier ISP's with, arguably, a far better
> acquisition/retention dynamics as a springboard for broadband.
> 2. WE THINK THERE IS UPSIDE TO OUR Q2 PROJECTION - We have been looking
> for Q2 results (to be reported 8/17th) of $6.0 billion in revenues (+39%)
> and 17c EPS with unit growth of about 49% and ARP of $2230, down 3%
> sequentially and 7% Y/Y. The market research services have posted Dell's
> Q2 unit growth at 52%, and while the correlation is never precise, given
> relatively stable but aggressive pricing combined with upsell drivers, we
> think there is a decent shot at $6.1+B, up 41%. We recognize a penny EPS
> these days takes almost $30MM after tax; but, if gross margins hold or
> lift sequentially, as we think they will, we think 18c is doable.
> 3. REITERATE STRONG BUY - Dell remains our top pick in this space; we
> are maintaining a 1/strong buy rating with a $55 price target; upcoming
> triggers include the expected ISP rollout along with 8/17 Q2 release.
> Dell has scheduled an analyst meeting in early October but will be
> presenting at SG Cowen Fall Technology conference on Tuesday, September
> 14th.
> Abbreviated Quarterly P&L Model ($MM)
> Q1F99 Q2F99 Q4F99 Q1F00A Q2F00E Q3F00 Q4F00 F1999
> F2000E F2001E
> Net Sales $3,920 $4,331 $5,173 $5,537 $6,000 $6,650 $7,350
> $18,242 $25,537 $34,175
> %Ch. Y/Y 51% 54% 38% 41% 39% 38% 42% 48%
> 40% 34%
> Units 1,585 1,809 2,202 2,402 2,688 3,051 3,440 7,628
> 11,581 16,485
> %Ch. Y/Y 66% 74% 55% 52% 49% 50% 56% 64%
> 52% 42%
> Rev/Unit ($K) $2.47 $2.39 $2.35 $2.30 $2.23 $2.18 $2.14
> $2.39 $2.21 $2.07
> %Ch. Y/Y -9% -11% -10% -7% -7% -8% -9% -10%
> -8% -6%
> Gross Margin 22.3% 22.7% 22.4% 21.5% 21.7% 21.8% 21.6%
> 22.5% 21.7% 21.5%
> Opex % Sales 11.3% 11.6% 10.9% 10.7% 10.7% 10.7% 10.5%
> 11.3% 10.6% 10.6%
> %Ch. Op.Exp Y/Y 58% 53% 33% 33% 28% 30% 37%
> 47% 32% 33%
> % Operating Mgn 10.9% 11.2% 11.5% 10.8% 11.0% 11.1%
> 11.1% 11.2% 11.0% 10.9%
> %PTM 11.1% 11.4% 11.7% 11.2% 11.3% 11.4% 11.4% 11.4%
> 11.3% 11.2%
> %Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
> 30.0% 30.0% 30.0%
> %Net Mgn 7.8% 8.0% 8.2% 7.8% 7.9% 8.0% 7.9% 8.0%
> 7.9% 7.8%
> Shares (FD) 2,800.0 2,784.0 2,750.0 2,738.0
> 2,720.0 2,705.0 2,690.0 2,772 2,711 2,675
> EPS $0.11 $0.12 $0.15 $0.16 $0.17 $0.20 $0.22 $0.53
> $0.75 $1.00 |
