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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Venkie who wrote (40672)	5/6/1998 8:22:00 PM
From: jim kelley	Read Replies (2) \| Respond to of 176387

RE: INVENTORY BLOAT IN THE CHANNELS Analysis of CPQ's financial statements yields interesting information on the company. When we take management's statements and juxtapose them with the financial statements certain inferences may be made. Earl Mason has stated that it "will another quarter of adjustment to put the Company's core business on a track of improved profitability." "As a result we are seeing an acceleration of sales out of the channel," said Ekhard Pfeiffer. "As we indicated in early March, sales from our North American commercial channels were not meeting our expectations. (Source: April 15, 1998 CPQ press release.) 1) At this time the accounts receivable and the accounts payable are roughly in balance. 2) The company's liquid assets have been building up, perhaps in preparation for the DEC purchase. 3) The company has been factoring its accounts receivable in order to improve its liquidity for at least the last two quarters. 4) The reported inventories at CPQ have been about the same for the last year with a couple of exceptions. Thus, this number does not indicate the inventory bloat they have reported in their channels. Thus they have pushed this excess inventory off into their channels and taken its off their own books. The retail channels have complained about their inventory bloat and have stated that CPQ wants them to take on even more inventory. a) April 27, 1998/FOOLWIRE/ -- PC maker Compaq, "while shipping 55% more units to distributors, still has not seen many of them wind up with end-users." b) Link to Sever Inventory Problem techweb.com 5) It is unclear from the financial statements what liability CPQ retains for the excess inventory in the channels. One can surmise that this comes in the form of some kind of channel rebate and or price protection rebate. It does not appear that CPQ accepts any significant amount of inventory returns from their channels. I infer then that they make cash payments to them instead. This may be the reason that CPQ's profits are so far off this last quarter while their revenues are off only by a higher than usual seasonal amount. 6) CPQ has the dual problem of introducing new product while attempting to clear the retail channels of the rapidly obsoleting inventory bloat. This puts an enormous burden on the channels and probably must be paid for ultimately by CPQ. Channel dealers have been complaining for sometime. The effect of this type of problem is that it distorts the financial statements and leads the investor to think that the company is doing great while its is actually undergoing severe problems. The distortion is because the revenues look great but there is actually no sale through. So the margins are going to look good too and of course the profit looks good, etc. However, unless the company keeps stuffing its channels with new goods the revenues will fall off because the channel is selling the product they bought last quarter. Meanwhile, CPQ is having to make payments under one quise or another to the channel because of the price cutting that is required. Note: CPQ has stated that they expect no profit this quarter. I would also expect that their revenues will be significantly off unless they are continuing to stuff their channels. Based on past behavior, I would expect CPQ to continue to stuff their channels until after the DEC merger. At that time it will be difficult to discern the state of their inventory because they will have consolidated financial statements. 7) We know that the problem is not confined to the retail channel but is also happening in the corporate channels because of the numerous news report to that effect. Accounts Accounts Revenues Payable Receivable Net Accounts 12/31/96 5965 2098 3718 1620 3/31/97 4805 2158 2710 552 6/30/97 5012 2421 2172 -249 9/30/97 6474 3026 2888 -138 12/31/97 7323 2837 2891 54 3/31/98 5687 2812 2743 -69 Liquid Cash Investments Assets Inventories 12/31/96 3008 1073 4081 1267 3/31/97 4554 194 4748 1258 6/30/97 4215 898 5113 1598 9/30/97 4840 1118 5958 2007 12/31/97 6418 344 6762 1570 3/31/98 7107 0 7107 1256