To all:
This from Mr. Joyner, a current Dell bear from Oppenheimer....
<<Far and away the most noteworthy observation in our June quarter PC
price survey is the aggressive tact Compaq (CPQ--NYSE $31, Buy) has
maintained on pricing, especially in comparison to Dell (DELL--OTC
$100, Hold) in the corporate desktop segment. Compaq's pricing was
below average in eight of 10 desktop configuration categories; and,
for the first time in the more than two years our survey has been
conducted, undercut Dell pricing in two key corporate configurations
by more than $100. What's interesting about this is that the Compaq
configurations were from the company's relatively new build-to-order
EP series, not old, leftover Deskpro configurations. This suggests
that the price advantage direct vendors had on new products because
indirect vendors were mired in moving older systems first before they
could drop prices on new configurations may be over. While Dell is
still left with a theoretical pricing advantage due to the lack of a
middleman distributor, it appears that Compaq is willing to eat the
difference to eliminate outright Dell's corporate desktop price
umbrella. And the Compaq prices did not include further VAR discounts
we uncovered that would shave another $200 or so off of the 266-MHz
Pentium II configuration.
Compaq's average quarter-to-quarter price cut of 29% was also the
largest drop among the seven desktop vendors surveyed. We believe this
reflects pricing actions to accelerate the liquidation of inventory,
but we also think that Compaq may be taking a more permanent strategic
pricing position in its high-volume corporate line as the company
integrates the high-margin server and services businesses purchased in
the DEC deal. In other words, we suspect that, even after all
semblances of inventory excess for Compaq disappear, we believe Compaq
pricing will remain extremely competitive because of the margin
subsidy possible from the DEC businesses, a strategy that,
theoretically, only IBM (IBM--NYSE $117, Strong Buy) and
Hewlett-Packard (HWP--NYSE $59, Hold)
could match due to their broad high-end server products and services
and software capability. Direct vendors such as Dell looked
dangerously exposed due to its more narrow product line and lack of an
in-house service infrastructure.
Speaking of H-P, after observing that it would likely slow its torrid
unit growth of about 70% through less aggressive pricing in favor of
regaining PC profitability, the company was the most expensive in
terms of Pentium II corporate configurations but looked extremely
competitive in consumer systems. The company admitted after a
disappointing April quarter that its PC business had favored
market-share gains too much at the expense of margins. We suspect
that Hewlett-Packard will see its unit growth rate drop materially in
the July quarter in view of the change in pricing strategy and
Compaq's very aggressiveposition, but its overall average
quarter-to-quarter price cut of 28% ranked it second in terms of
largest declines.
IBM, with the exception of K-6-based consumer configurations,
generally was priced above the averages in most configurations, seeing
only a 19% average cut in the quarter, still large in absolute terms,
particularly if one annualized the percentage drop, but clearly less
aggressive than the other major indirect vendors as it also tries to
recover some margin after a disastrous first quarter plagued by excess
inventory. Still, we believe IBM's less dramatic pricing may be a
sign of progress in terms of better balancing supply but suggests unit
growth will continue to be slower than most of the other vendors'
rates.
As a whole, the indirect vendors had much heavier average price
declines than direct vendors Dell, Gateway (GTW--NYSE $62,
Underperform) and Micron Electronics (MUEI--$12 3/4, Hold). Micron had
the lowest average price cut only 1% because it clearly is trying to
hold the line in favor of maintaining marginal profitability, although
its unit growth may remain suspect as it has in the past three
quarters. We also think Gateway is less aggressive with its pricing
these days because of the need to maintain a historically high gross
margin of 19% or more to cover the rising fixed costs of its Country
Store expansion as well as the Advanced Logic acquisition last year.
But, again, we don't think a vendor can stabilize pricing to hold
margin and expect unit growth not to slow in the increasingly zero-sum
game that the PC segment appears to be. This is why our positive
ratings (Compaq and IBM) are on stocks that have a broader and
higher-margin solution to sell in the corporate market.
The delta in the broad averages for each category compared with March
averages showed that configuration categories saw price declines
overall of 17% versus 16% in March. Thus, price cutting remained
vigorous in the quarter by historical terms. Continued high
double-digit average cuts ensures that industry average selling prices
will continue to drop for the vendors surveyed, although probably not
as much for the less aggressive direct vendors. Still, we suspect we
will see some aggregate shift of unit growth rates and unit share back
toward indirect vendors that can better afford to take lower PC
margins in the long term as their models become more build-to-order
and selling PCs bundled with other products and services becomes much
more the norm from these vendors. Let us be clear on this point:
Whether your direct or indirect does not determine your growth rate in
either units or share--pricing typically does. Direct vendors at one
time had distinct pricing advantages that may now be dissipating as
indirect vendors either copy their models or increasingly view the PC
as a "loss leader" in the corporate environment in the context of
getting a big-box or services sale.
As far as the notebook market is concerned, our relatively new survey
is sketchy this quarter, with only four configurations sampled among
six vendors. Comparative data is limited because some configurations
are no longer carried by vendors such as Dell and Gateway versus the
March quarter and three out of the four categories measured are new
this quarter. We hope to have more definitive analysis in the
third-quarter survey in the notebook segment. However, it was clear
that, unlike its desktop presence, Dell is one of the most
aggressively priced vendors, while Compaq is one of the most
expensive. Notebooks were a source of revenue upside for Dell in its
April quarter, and this continued aggressive pricing in portables
likely ensures the vendor continues to maintain relatively high unit
growth. Micron, on the other hand, was somewhat less aggressive than
the March survey, reflecting a correction to a major inventory
oversupply. No. 1 vendor Toshiba's pricing was fairly high
overall, which suggests that a year-long inventory glut with this
vendor may be over. The same goes for Compaq and IBM.
Following are some of our graphs illustrating how rapidly given
configurations in the consumer and corporate segment have dropped in
the past five quarters. Annualized price drops for a specific
configuration of 50% or more are still quite common, supporting our
thesis that, increasingly, revenue growth for a vendor depends on
share gains and share gains are getting increasingly expensive to
margins.>>
Comments anyone?
Gene |
