Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Geoff Nunn who wrote (48315)	6/20/1998 2:02:00 PM
From: rudedog	Respond to of 176388

Geoff - The phenomenon of the 'white box' vendors has been a hot topic of discussion in the industry for a while. 'Other' is clearly the biggest vendor out there, with nearly twice CPQ's share. What is missing from this analysis is the composition of 'Other'. MSFT did a lot of research into this sector, which was the target of their 'small business server' (SBS) product. what they determined is that the attrition rate in this industry is terrible, nearly 40% of the firms in the market today will not be there next year. The ones which survive are diversified, with PCs being a 'loss leader' for other products, like TV's, washing machines, etc. Some assemble their own boxes, some get private labeled boxes from the far east or our west coast. This is not a good business in and of itself. So I agree that it's profit that matters, and I think that both Dell and CPQ, in different ways, will get to a similar profitability model later this year, with maybe a 1 or 2 point edge to CPQ. Let's take a quick look at what CPQ's economies of scale have produced (leaving aside for the moment their last 2 quarters which I regard as an anomaly). CPQ generated an overall GM of 28% in 1997. There is about 6% better than Dell. How does CPQ manage this given that their overall MFG and cash management is not nearly as good as Dell's? The answer is that their volume gives them much lower component costs, as much as 10-12% lower in many cases. Dell does it through excellence of execution, CPQ does it through good execution and volume commitments. CPQ's problem is that they have traditionally given away that 6% and more through various distribution inefficiencies. They used to give up nearly 10% in contra-revenue to support price protection, but under the new guidelines that number should be closer to 2%. When those programs come to fruition later this year I would expect CPQ to have a 1 or 2 point advantage in overall margins despite their less efficient MFG and distribution. Dell will probably get some of that back through enhanced inventory management in 1999.