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

To: TechJustice who wrote (101567)	2/17/1999 7:56:00 AM
From: jim detwiler	Read Replies (4) \| Respond to of 176387

PRU Comments o Last night, Dell reported $0.31 EPS vs. our $0.32 estimate and Street consensus of $0.31 per share as a result of weaker-than-expected revenues of $5.2B (a 38% increase) vs. our $5.4B estimate (46% increase). O Units shipped of 2.2MM were 100K shy of our estimate and accounted for the majority of the $200MM revenue shortfall. The unit shortfall was the result of poor execution and pricing management decisions in the 3Q and 4Q. Management has taken corrective actions in the Q4 and win rates materially increased by quarter end. Management noted it exited the quarter with record levels of business in the pipeline. o While the results were clearly disappointing, it's important to note that the model is not broken. The advantages of the model remain intact. We believe the shortfall was execution - rather than market driven - and believe Dell remains the best positioned in the group. o The execution miss will result in a multiple compression for the shares. However, based on after-hours trading, we believe the stock has largely corrected for this outlook. With few large cap technology names capable of generating 40%+ growth, we believe Dell remains best positioned in the PC group. o We are maintaining our earnings estimates but lowering our target price to $90 from $107 based on expected multiple compression on the shares. Highlights of 4Q Earnings Announcement Last night after the close, Dell reported $0.31 EPS vs. our $0.32 estimate and Street consensus of $0.31 per share. Weaker-than-expected revenues of $5.2B (a 38% increase) vs. our $5.4B estimate (46% increase) accounted for the primary variance. Revenue weakness was triggered primarily by a 4% unit shortfall. Q498E Q498A Variance Unit 2.3MM 2.2MM -4% ASP $2,368 $2,350 -1% Revenue $5.4B $5.2B -5% Management noted the revenue shortfall was a "surprise" and that prior to the company entering its quiet period, revenues were expected to come in-line with consensus estimates of $5.4B. Poor execution of pricing management during the 3Q, failure to pass along sufficient component cost savings in the 4Q, and the deferred roll out of some large orders into the Q1 led to the unit shortfall. First, management noted that Dell failed to price as aggressively as needed in response to customer RFPs during the 3Q and as a result, large corporate revenue momentum slowed into the Q4. In response, Dell increased its price aggressiveness during the Q4 and saw win rates significantly increase on new business in the Q4. In fact, Dell maintained that it is now exiting the quarter with the strongest pipeline in years. As a result of the change in pricing strategy, Dell saw win rates increase to 50%-60%, which represent the highest levels in years. Secondly, Dell stated that it failed to pass on cost savings as aggressively as it should have during the quarter - leaving revenue growth on the table. Lastly, management stated that the shift of orders from 2 large customers from Q4 into Q1 caused some negative impact. Collectively, these factors resulted in a 100,000 unit shortfall which represented the bulk of the revenue miss. By product category, the unit miss was broad based across product categories, but more concentrated in enterprise and desktop segments vs. notebook: Units 4Q98E 4Q98A % Variance Desktop 1,806K 1,722K -5% Notebook 422K 414K -2% Enterprise 76K 69K -11% Gross margins were in line with our estimates at 22.4% - and by management's admission - one of the negatives in the quarter in light of the strong opex scale. Operating expense leverage was stronger than expected at 10.9% of sales (or $566MM) vs. our 11.3% ($613MM estimate). The net effect of in-line margins and better opex leverage caused net margins to expand to record levels of 8.2% from 8.0% in the prior quarter and 7.6% in the prior year. These higher levels of profitability were a "negative" by management's admission since they failed to leverage the improved opex to maximize top line growth. Management noted that if the company been more aggressive on price, Dell could have generated an additional $200MM in top line growth and $0.01 in EPS. Internet sales increased to $14MM day and now represent 25% of Dell's business. Management maintains this level can increase to 50% over the next several years. Increasing Internet sales has been one factor allowing Dell to achieve better opex scale, and we expect increased mix will drive further opex leverage going forward. Once again, Dell demonstrated strong working capital efficiencies - reducing inventory days to 6 from 7 and decreasing DSO to 37 from 41. The company also generated $750MM in CFO and increased cash balances by $384MM after repurchasing 15MM shares of stock. The company announced a 2/1 stock split effective March 5. Outlook and Investment recommendation With a strong pipeline of orders built and corrective pricing actions taken during the Q4, Dell is well positioned entering Q1. Expectations are for Q/Q revenue growth of approximately 5% to $5.5B - in line with normal seasonal trends. We are modeling FY00 revenue growth of 39% to $25B in line with our prior estimates. Management remains optimistic about the prospects for accelerated Y2K buying to drive incremental growth at large corporate customers in the 1H and in small/medium business customers in the 2H. Gross margins are expected to decline in line with management's objective to leverage improved opex scale and maximize top line growth. We are modeling GM erosion from 22.4% in the 4Q to 22.2% sequentially and scaling down to 22%. We are modeling opex/sales of 11.0% vs. the 10.9% achieved in the 4Q. We remain comfortable with our EPS estimates for both FY00 and FY01. However, given the company's poor execution in the 4Q, we believe multiple compression will result. We are lowering our price target as a result. Our price target of $107 had been based on a 53X multiple (reflecting a 33% premium to the company's growth rate). This premium was, in part, afforded to the company based on its consistency of execution. Now, with the execution stumble, we are lowering our growth multiple assumption to 45X (reflecting a more modest 12% premium). We firmly believe the advantages of the model remain intact and that management has refocused and is well positioned entering 1999. We still believe Dell maintains the strongest growth prospects of the group and is best positioned to drive superior revenue and earnings growth gains. We believe the correction in the shares over the past 2 days (including after-hour trading hours) has largely corrected for this outlook. We would use additional weakness in the shares as a buying opportunity.