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

To: Jack T. Pearson who wrote (50094)	7/8/1998 2:30:00 AM
From: rudedog	Read Replies (2) \| Respond to of 176387

The more I look at the information on CPQ's 1Q and 2Q problems, the more astonishing the performance of some of the key CPQ executives appears. Keep in mind that all of CPQ's problems stemmed from one area - North American commercial desktop sales. European sales were pretty much on target in all areas (note that there are almost no channel sales in CPQ's European model, that is a US phenomenon). And worldwide consumer sales were also strong, growing at nearly 90% year over year. Realizing that Europe represents nearly 40% of CPQ's sales, and enterprise business is a third of US sales, and consumer products are another 20% of US sales, we can see what a truly spectacular tank must have occurred in the north American commercial channel to pull the whole company down to zero earnings for 6 months. Based on my rough calculation above, I would guess that North American commercial desktops traditionally amounted to about 25% of CPQ's total business. We know that the server business contributed much of the overall margin, so desktops probably averaged less than 20% GM even in the best of times (chuz and I have worked this around several times and I think we agree that the number is less than 20% for both consumer and commercial desktops). In order for the north American channel stuffing to have eaten all of the earnings company wide, they must have given away ALL of their margin, and another 10 to 15% on top of that. It's no wonder that most of the management that was on the bridge for that watch is now exploring other opportunities. Their write-off on restructuring appears to be double the original estimate. I have heard this same statement from several analysts but I went back and looked at the statements made since the DEC acquisition was announced in January, and I have seen only very minor changes in the anticipated restructuring write-off. I think the number moved from an original estimate of $5.4B to $5.7B. I think somebody was looking at only part of the original information and comparing it to the consolidated number to come up with the 'doubling' claim. But having said that, I think that the original number was intended to cover a multitude of sins. This is the traditional 'get out of jail free' card, and although companies don't have the latitude today that they had in the past, there are just too many judgement calls when accounting systems are combined in companies of this size to pin down the numbers exactly. Are they hiding a $2B problem for this last quarter? Total sales for the North American commercial business would be about $6B based on the rough calculation above. And based on what happened in 1Q they did generate a problem that would have been $2B annualized. But that showed up pretty clearly in 1Q when about $500M in earnings vaporized, with apparently a like amount in 2Q. I just don't see where they could have developed another $2B liability - that would imply that they actually GAVE AWAY all the product they shipped in 1Q and 2Q since the total value of those shipments would have been $3B and $1B is already accounted for publicly. The evidence does not support actual free computers - it looks more like machines targeted at $1500 were being sold for $999, and so forth across the line. A 30% hit to the top line would explain the $1B loss pretty cleanly. So I guess my feeling is that they are not hiding a current liability of $2B because there's no way to have generated it. I would believe that they are building in some cushion for 3Q and 4Q but I am not savvy enough to understand how that would work, based on the info I can get. Finally, who gets Compaq's share? Well quite obviously in the commercial desktop space, Dell and HP have been the beneficiaries, Dell getting there honestly and HP buying the share at the cost of their own earnings picture. In most other areas CPQ has maintained share, and in some cases gained, while IBM has been the consistent loser. I think CPQ will carve off much of IBM's server business, and Dell will continue to take desktop share from everyone, CPQ included. HP may have to give up buying share, especially now that their Merced play has moved out 9-12 months. My sense is that Intel hurt HP badly with that slip, and HP will change their strategy to adjust.