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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Katherine Derbyshire who wrote (24448)	9/20/1998 2:12:00 AM
From: Gottfried	Read Replies (1) \| Respond to of 70976

Katherine, there is a discussion of gross margin in the report. It is not clear to me whether the decrease in GM is permanent. Bold emphasis mine. This has been instructive. Gottfried GROSS MARGIN Gross margin as a percentage of sales decreased to 18.5% from 27.4% for the six-month period of 1998 and 1997, respectively, and decreased to 19% in the second quarter of 1998 compared to 27.9% in the comparable period of 1997. Product gross margin as a percentage of product sales declined to 17.7% from 27.4% for the six-month period. The decrease in product gross margin resulted primarily from significant pricing and promotion actions taken in the North American market to adjust the business model to meet the goals of Compaq's Optimized Distribution Model over the six-month period. Service gross margin as a percentage of service revenue increased to 33.7% from 27.1% for the first six months of 1998 and 1997, respectively, and increased to 31.3% from 26.4% in the second quarter of 1998 compared to the same period in 1997. The increase in service gross margin is primarily attributable to the inclusion of Digital for the last two weeks of June. sec.yahoo.com

To: Katherine Derbyshire who wrote (24448)	9/20/1998 8:18:00 AM
From: Duker	Read Replies (1) \| Respond to of 70976

Katherine, Really noisy quarter you are comparing. First, in the year ago June quarter, the company did not exactly have a clean "system-wide balance sheet"...(combine the channel and the company's own inventories...the artful balance between over-production and short-term gross margin improvements...a balance that CPQ has managed to screw up royally over the past several years). This has the effect of boosting GM -- the exact magnitude of the boost is not determinable ... though my guess is that if you got Earl Mason really drunk, he could tell you within a 40 bpts. Second, I believe the company took some down-time in the second quarter of 98. Two weeks I believe? This clipped a bunch more from the GM line...not amortizing those nasty fixed costs... Third, I am sure there were some "sizeable incentives" to flush the channel that depressed GMs further. I do not disagree that, using CPQ's model (whichever one you want to choose), GM are likely to trend down in a competitive environment...but, it is a pretty tough comparison without a bunch of footnotes...most of which I am probably missing...but directionally...the point is the same. --Duker