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To: Patrick E.McDaniel who wrote (25304)	12/16/1997 9:44:00 AM
From: Boplicity	Respond to of 176387

More Bull food. To: steve (11404 ) From: Kai-Uwe Tuesday, Dec 16 1997 3:22AM EST Reply # of 11428 More info... This is the Cowen post (which I trust a lot more than the other garbage that's out there). K. CPQ: OUTLOOK REMAINS POSITIVE POST VISIT; REITERATE STRONG BUY 08:43am EST 15-Dec-97 Cowen & Co. (CHU, RICHARD) ==================================================================== Quarterly EPS EPS Rev CYPE Q1 Q2 Q3 Q4 F96 1.71A 0.32 0.30 0.48 0.63 F97E 2.70 no 20.7X 0.53A 0.60A 0.71A 0.85 F98E 3.50 16X 0.70 0.80 0.90 1.10 F99E 4.35 12.8X ========================================================================== Key Points: 1. Confident on Q4 ests; apt reserve conservatively going into Q1. 2. Good progress on ODM deployment. 3. Maintain 98-99 estimates predicated on +24%/+23% revenue growth, which have upside. Bottom line - The global PC business will continue to consolidate and CPQ will be a major driver and beneficiary of this consolidation. Recent nervousness over the short-term picture presents a compelling entry opportunity since we expect 25%/annum EPS growth over the next several years; return to recent highs would drive 35% upside near term. 1. Tone of business remains strong; especially in for enterprise commercial NT sector; Q4 look solid -- With less than 3 weeks to go in Q4, we emerged from our visit to CPQ last Friday feeling very confident that it is in strong shape to meet/exceed consensus Q4 EPS expectations. We continue to look for Q4 revenue of $7.68B (+29% Y/Y) and EPS of $0.85, these assuming combined gross margin of 26.8%, down fractionally from the 27.4% GM posted in Q3. * Actual Q4 P&L is likely to depend on conservatively management positions it self, i.e., how aggressively cushions and reserves going into the new year, given the prevailing macro uncertainties in Asia and in view of the usually seasonally weaker Q1. Specifically, we expect that reserves in the form of larger than normal revenue-contra item deductions could be taken along several fronts: a) receivables reserves, to cover potential credit problems with Asian intermediaries, and b) the usual contra items covering promotional allowances. * In the meantime, all else being equal, CPQ should benefit from lower component prices; we gather that ASP's in Q4 appear to be flattening out (attributable primarily to mix - with the sub $1000 PCs evidently a bigger factor in the back-to-school market than for the Christmas season). Our most recent model has been predicated on unit growth of 58% and revenue growth of 33% (33% for CPQ only, 29% for CPQ+TDM) --- we think this spread could be perhaps 5-10% points narrower with an ASP erosion in Q4 of more like 10% Y/Y rather than 15%. 2. Compaq continues to see strong global demand: Demand is strong in the US, recovering robustly in Europe, and good in Latin America (Mexico and rest of LA very solid, except for Brazil weak); there are no surprises in Asia (8-9% of sales) although management is cognizant of potential risks in the region. In addition, it is fully hedged on currencies in Asia near- term, and expects hedge profits to exceed translation losses. 3. Inventories on track to hit 15X in Q4; channel stocks should decline from Q3, how much remains to be seen -- Compaq asserts it is on track to deliver a 15X internal inventory turn at year-end, up from 10-12X at mid year. It continues to target an improvement to the 25X by the end of 1998 and 30x in 1999 as the ODM model is deployed more fully. Exiting Q3, channel inventories were 5-6 weeks; we expect these levels to decline sequentially by the end of December; how much obviously remains dependent on the level of sales-out over the remaining weeks, although it seems unlikely (though we don't rule out) that channel stocks get down to the 2- 3 week level hoped for earlier in the year by management. So-called "buy- ins" with the channels have been at normal levels and have been restricted to non-BTO options products (memories, monitors) accompanying either product phase-outs/transitions or other build-to-forecast variances. Compaq's CFO categorically denied that buy-ins on CPU desktops/CPU products have occurred. In the meantime, while portables continue to be a relative point of under performance with aggressive pricing pressures continuing from Toshiba, Compaq has successfully reduced internal inventories of portables (predominantly, not yet on BTO) to less than 8 days, compared with dramatically higher levels earlier in the year. 4. Big commercial enterprise NT backlog needs to be met -- Since the ODM (Optimized Distribution) Model is still in a roll-up phase, we would not be look at a more modest reduction in channel stocks as disconcerting. European commercial products are now 100% on BTO and the US is approaching the same, pending the cutover of Portables. CTO operations in Houston (along with 4 other global configuration sites including Australia) are now up and running, although the volume levels that we saw were still nominal, dealing primarily with small volume web-generated orders. Management indicates that enterprise demand for commercial NT installations (both server and client) has been extremely strong going into the calendar year- end and that the commercial sales-out picture at year-end appears to be in part constraint by the ability of the channel to meet this backlog with trained NT support/installation people. 5. Maintaining 1998-99 P&L thinking - Fundamentally, we continue to believe that CPQ is strongly poised to benefit from global consolidation of the PC business, even as it drives its aspirations into the enterprise markets. We have previously outlined 1998-99 EPS projections of respectively $3.50 and $4.15, predicated on revenue growth to $31B and $38B and operating margins of 12.6% and 12.9% as the enterprise business mix richens and as Compaq derives increased benefits from its reengineered ODM model.