Semiconductors . . . Cypress Semi cut to Reduce from Neutral at UBS based on valuation. UBS says CY shares have increased in valuation over the past few weeks without a corresponding improvement in fundamentals, in firm's opinion. Stock up 49.5% since pre-war lows on Feb 10, while SOX has risen 22.4%. Firm maintains $6 target.
Business Week reported that a group that controls 10% of Celeritek's stock is "seeking to oust the board to stanch Celeritek's financial bleeding and to consider buyout bids as a way of enhancing shareholder value." Article notes that, last August, company rejected an $8.75/share bid by Anaren, which represented a 25% premium at the time.
Preannouncements by STMcro and previously, Microchip raise concerns for Texas Instruments. TXN’s March Quarter will be in line, reflecting differences in end markets and products. But raises risk to June +5% Quarter/Quarter estimate as large vertical markets. are clearly beginning to slow. Enthusiasm for this recovery play is limited by valuation and perception of increasing risk.
Boxmakers . . . Dell CFO Jim Schneider kicked off the meeting with a review of Dell's impressive 2002 financial performance. In an extremely difficult IT spending environment, Dell grew revenue 14% year over year in an overall PC market which declined 11% year over year, expanded operating margins by 70bp and outgrew worldwide PC shipments by a whopping 20 percentage points. In fact, Schneider noted that Dell gained more share during CY02 than any other year in the company's history.
Schneider detailed the various sources of Dell's cost advantage versus competitors, including 10 points from lower SG&A and superior inventory management, 4-5 points from lack of reseller mark-up and 1-2 points from lack of contract manufacturing mark-up. Schneider also noted several of the less quantifiable benefits of Dell's direct, build-to-order model, including greater visibility into customer needs (i.e., more accurate demand planning) and the ability to provide component suppliers with end demand visibility. Schneider believes that Dell generally prices 10% below the competition and yet produces 8% operating margin versus competitors' break-even margins or losses.
Schneider also reiterated Dell's intent to remove more than $1 billion from total costs this year after having removed a similar amount last year. Schneider commented that 85% of Dell's cost reductions have been reinvested in pricing to drive share gains while 15% have fallen to the bottom line. In contrast, roughly two thirds of Hewlett-Packard's $3B in merger- related cost savings have fallen to the bottom line, another 10-15% have been used to offset rising pension and post-retirement expenses and just 20% have been reinvested in pricing and market share gains. Net, net, to the extent that HP opts for profitability over share gains, Dell will maintain a 5-10 point price advantage.
Schneider also discussed Dell's impressive ability to increase share of wallet once it penetrates a new account. Within those accounts designated as "acquisition accounts," or new large corporate accounts, Dell has increase revenue 10X over a three-year period, with gains fairly evenly distributed across clients, servers, software and peripherals. Efforts to slow this rate of share gain are part of Hewlett-Packard's rationale for maintaining a presence in commercial PCs, in our view.
Schneider's goals for 2003 are not surprising: profitable share gains; competitive pricing and maximization of operating profit dollars; additional cost savings; and, share repurchase.
President and COO Kevin Rollins discussed Dell's growth strategy, which has remained very consistent for many years: geographic expansion; product line expansion; and, continued share gains in the U.S.
As expected, Rollins drew a clear distinction between "tier one" growth opportunities (servers, storage, services, software and peripherals) that are already significant revenue and profit contributors for the company, and "tier two" opportunities (printers, networking, PDAs and projectors) in which the company is currently investing for the future. Rollins estimated the total "tier one" available market at roughly $350B in 2002.
From a geographic perspective, Rollins noted that while Dell has 30% PC market share in the United States, the company has just 8% share outside the U.S. and several Western European markets. Moreover, while Dell outgrew worldwide PC shipments by approximately 20 percentage points in 4th quarter the company's out performance in Asia Pacific and Japan was 29 points and 47 points, respectively. Even in China, which many analysts consider to be a less-than-even playing field given Legend's preferential access to local government and education accounts, Dell grew total unit shipments 72% and revenue 42% during 4th quarter. Finally, in Europe, which Dell has referred to as "fortress Hewlett-Packard" in the past, the company outperformed total market unit shipment growth by an impressive 16 percentage points during 4th quarter. During the coming year, Dell views France, Japan, Germany and China as key growth drivers.
In Enterprise products (servers, storage, services, workstations), Rollins commented that Dell's bid win rate remains above 70%, largely unchanged versus prior years. Total Enterprise revenue grew an impressive 19% year over year during 2003 (+51% year over year for enhanced services, +10% for servers, +67% for external storage, +35-40% for total storage) and Dell won more than 4,500 new server customers during the year. While the company won 2,500 new storage customers with the Dell-EMC product line during CY02, Rollins noted that roughly 50% of the Fortune 500 do not buy Dell-EMC storage yet.
On services, Rollins reiterated Dell's view that hardware and software standardization will drive services commoditization as well. Rollins believes that "standardized" or "standardizing" services categories now represent 75% of the total $550B services market and a slightly greater percentage of services industry operating income. Dell will augment its traditional "standardized" hardware support offerings with managed services, deployment, training and software support offerings during the coming year. According to Rollins, this should increase Dell's available services market to more than $100 billion annually. Moreover, because Dell relies on third party providers for one-site service (and therefore buys capacity at close to marginal cost) and focuses on remote resolution whenever possible, Rollins believes that Dell enjoys a 20% cost advantage versus competitors in services.
Rollins articulated a view that two winning strategies are emerging for systems companies today: Dell's standards-based model and IBM's proprietary services-led model. Rollins believes that companies positioned between these two options (i.e., Hewlett-Packard and Sun will not be successful over time. While we agree with Rollins' conclusions, we would argue that even IBM's proprietary model will eventually succumb to the standards-based model as well---it will simply take longer given IBM's large mainframe installed base. In other words, IBM's large mainframe annuity profit stream will insulate it from the steady encroachment of standards-based technology for a longer period of time than Sun, but probably will not drive growth. We view Dell's standards-based model as the only growth strategy for systems companies near-term and long-term, and the ultimate winner.
Finally, Rollins cited "growing confidence" in Dell's long-term target of $60 billion in revenue within 3-4 years, once again implying potential for 15-20% compound annual revenue growth. While client revenue is only expected to grow at a 5% CAGR, servers, storage, services, software and peripherals are each expected to double over a 3-4 year period. These estimates seem entirely reasonable to us.
Chairman and CEO Michael Dell ended yesterday's meeting with a compelling argument in favor of industry standard platforms over proprietary ones (RISC- UNIX, mainframe, etc.).
Dell cited more than 3,500 SAP installations on Dell hardware to date (1,000 during the past year alone) and more than 22,000 Oracle database implementations. Our own surveys suggest that 50-70% of Fortune 1000 CIOs have plans to implement mission critical applications such as ERP or CRM on standard Intel servers during the coming months.
The growing momentum of Intel architecture servers reflects, in part, significantly lower total cost of ownership than proprietary RISC-UNIX systems. According to Dell, a two processor Intel server enjoys a 45-50% three-year total cost of ownership advantage versus proprietary RISC-UNIX (58% hardware cost savings, 51% administrative cost savings). Moreover, in reference to benchmarks results of Oracle running on Dell servers and proprietary RISC-UNIX servers, Larry Ellison contends that "those customers seeking better performance and scalability will just have to be willing to pay less." The benchmarks in question suggest that Oracle on Dell offers 40- 90% better performance than proprietary RISC-UNIX at 40-80% lower cost. In other words, today's two processor Intel servers are outperforming RISC, a gap that is likely to widen as the performance of 2-4 processor Intel servers increases 250% during the coming three years.
Dell noted that, because of rapid advances in processor and other component performance, today's four processor Intel servers are able to support six times as many Exchange users as three years ago....and at 20% of the cost! Net, net, rapid advances in server performance are causing the server market to move decidedly to Dell's strengths.
Clustering is yet another emerging capability improving Dell's competitive position in servers. In essence, the increasing ability to cluster small, Intel-based servers together and achieve near linear performance gains allows customers to buy compute power in smaller increments and scale their environments as needed. While some applications lend themselves better to this "scale out" architecture than others, software packages such as Oracle 9i RAC which do not require revisions to standard applications will probably make this architecture suitable for a growing number of applications over time. According to Dell, a six-node Intel cluster running Oracle 9i RAC and costing $240,000 is capable of supporting the same number of users as a large RISC-UNIX symmetric multiprocessing system costing $1.2 million.
Dell believes that continued rapid performance gains for 1-4 processor Intel servers in coming years (250% over three years), combined with more sophisticated clustering capability will allow an Intel scale-out architecture to displace large, proprietary symmetric multiprocessing RISC-
UNIX systems in the application and database tiers during the next 3-5 years. As the only server vendor with an exclusive focus on Intel architecture servers---all of Dell's competitors have at least one proprietary architecture that will lose out in this transition---Dell is best positioned
for this transition. The transition has already caused Dell's addressable portion of the $61B server market to rise roughly 40% during the past four years. Over the same period, Dell has increased its share of the available portion of the market 3X.
In summary, while there were few new data points at yesterday's meeting, management reviewed and expanded upon its case that Dell is the best positioned of all systems companies today---we agree. Given its position as low cost producer within the commodity PC business, its exclusive focus on the fastest growing portions of the server market, incremental storage opportunities arising from the EMC agreement and opportunities in other new product areas, we expect Dell to outgrow all other systems companies during the next 3-5 years.
Near-term, however, we see little or no upside to consensus revenue and EPS expectations which, combined with a recent move toward the high-end of the company's two-year $24-29 trading range, suggests little near-term upside in the shares. Do not expect the shares to work their way back above $30 until the second half of CY03
$32 target reflects a 26X P/E to estimated earnings twelve months in the future (i.e., 2005E eps of $1.22). The shares deserve a premium valuation relative to peers and the broad market due to above-market growth (estimated 23% earnings growth this year and 29% next year), impressive asset management (Dell collects from its customers 41 days before it pays suppliers), a 35-40% return on invested capital (including all cash, investments and intangibles in the capital employed calculation) and extremely strong free cash flow ($1.50 per share in free cash flow during the coming twelve months). From a DCF perspective, our $32 target implies 11% growth in free cash for the next decade and 5% growth in perpetuity thereafter---11% seems reasonable given mid-single digit blended growth for Dell's target markets, the company's industry leading cost position and untapped opportunities in new markets (storage, switches, etc.).
2020insight.com
Great post Robert. I hope you make a fortune but first of you don't mind I need to put my cash to work.
RtS |
