Dell's cash machine starting to slow
Company, a leader in generating cash, expects a falloff; growth, stock price could be affected.
By John Pletz
AMERICAN-STATESMAN STAFF
Saturday, May 4, 2002
One of the fattest cash cows in corporate America is slimming down.
For years, Dell Computer Corp.'s computer sales have helped it generate cash at twice the rate it has generated profits. It has amassed an $8.3 billion stash.
But in a regulatory filing this week, the company said those days are over. Dell said it is "unlikely" that the cash it generates from its business lines will exceed its profit in 2003.
Dell didn't provide estimates of how much its cash supply might dwindle, but there's certainly no short-term danger for the company. Dell will continue to generate a substantial amount of cash from its operations -- it just won't be able to increase its cash supply as fast.
In the past, Dell has used that supply of cash to expand or improve its facilities and get into new lines of business. But if cash flow tapers off, Dell will have less money to do those things.
It also likely means Dell's stagnant stock price won't move much; investors pay close attention to how much cash a company generates because it provides a window on its operations.
Shares in the company have stalled at under $30 since late 2000 and are down 11 percent this year. Dell stock closed Friday at $24.32, down $1.10.
Jay Taparia, a finance professor at the University of Illinois at Chicago who has studied Dell closely, says the company's stock price is "completely dependent" on how much cash flows from its operations. He says the prospect of generating less cash has put the world's No. 1 computer marker "at a crossroads."
To increase the amount of cash it brings in, Taparia says, Dell must come up with new products besides personal computers, which don't produce big profit margins.
"They have to come up with something new," he said. "They need to sell services or some high-margin product."
A Dell spokesman could not be reached for comment on the filing.
Dell, like other companies, gets its cash not only from sales but from a variety of sources, including investments, such as stocks and Treasury bills, and from running its business more efficiently. Profit, on the other hand, is what's left over after a company pays all its expenses, such as salaries and other manufacturing costs.
In the fiscal year that ended Feb. 1, Dell also said it spent $3 billion to buy back stock, more than twice its profit of $1.2 billion. This year, Dell said it expects to spend $2.3 billion on the program.
The buyback program is tied specifically to Dell's stock option program for employees. As more employees exercise options, Dell must create new shares of stock, which dilutes the value of the shares already in investors' hands. The buyback program helps offset that.
Dell also saw its tax benefits from the sales of stock options plummet last year to about $500 million from nearly $1 billion the year before. That's a half-billion-dollar impact to cash flow and profits.
Dell won't be living hand-to-mouth anytime soon. Even if cash flow only equals Dell's profits, the company will still bring in about $2 billion, based on forecasts by Wall Street analysts.
"They're still generating tremendous amount of cash," said David Bailey, an analyst who follows Dell for Gerard, Klauer, Mattison. "It's very strong."
Dell and fellow tech giants are among the most cash-rich companies in the world. Semiconductor leader Intel Corp., for example, sits on $11.6 billion in cash.
Slowing cash flow also is a sign that the super-efficient business model that made Dell a darling of Wall Street might be reaching its limit.
While Dell gets its money from customers up front, before it builds their computers, it makes suppliers wait weeks to get paid. And Dell has been ruthless in its relationships with suppliers, driving a tough bargain on price and payment schedules.
As an example of how the relationship is tilted to Dell's advantage, Dell doesn't take possession of computer parts until the minute they enter its factories.
"They probably can't squeeze suppliers any more than they already are, and they can't get money out of their customers any more quickly," said Joe Beaulieu, an analyst at mutual fund tracker Morningstar Inc.
In the past two years, Dell has doubled the time between when it receives payment and when it writes a check to suppliers, called the cash conversion cycle, to 36 days. Compaq Computer Corp., by contrast, has a cash conversion cycle of four days.
The amount of time Dell takes to pay suppliers is 69 days, up from 58 days a year ago.
"I don't think you can push out paying your suppliers much more than two months," Taparia said. "There's only so much you can mooch off your suppliers."
Taparia also sees Dell's cash-flow warning as further evidence of the high cost of the price war Dell started in late 2000, when computer demand began to slow. Dell slashed prices aggressively, even though it meant lower profits. Last year, Dell shipped 15 percent more computers, but the average price of its products fell 15 percent. As a result, revenue was flat, and profits, excluding restructuring charges, fell 32 percent.
"The price war that took place, they won," Taparia said. "But it was very much a pyrrhic victory. They took a dive in cash flow."
Another factor in cash flow is investment income. Dell lost $270 million last year from declining values of its venture-capital and other investments, compared with a $307 million profit the year before. Dell said it doesn't plan to add to its portfolio this year, valued at $335 million, which will help conserve cash.
jpletz@statesman.com; 445-3601 |
