Dell's Bigger and Better Q2 (Breakfast News) August 18, 1999


Wednesday, August 18, 1999

"The will to win is important, but the will to prepare is vital."
-- Joe Paterno

Dell's Bigger and Better Q2

By Brian Graney (TMF Panic)

Direct PC supplier Dell Computer (Nasdaq: DELL) romped on another set of quarterly financial figures, reporting second quarter earnings of $0.19 per share last night. Profits were up from $0.12 per share last year and $0.16 per share last quarter and $0.02 ahead of the First Call mean estimate. Revenues climbed 42% from last year to $6.1 billion, thanks in part to 100% shipment growth in consumer PCs. Dell's 55% growth in total unit shipments during the quarter was twice the estimated industry rate and suggests that the company is continuing to account for a substantial chunk of the overall growth of the PC industry all by itself.

As the firm grows in size and matures, fears have emerged that Dell will lose its golden business touch. So far, those concerns don't appear to be valid. While the quarterly revenue growth rate is down from its 50%+ heyday a few years back, the company continues to make strides in operating efficiency and asset management. Operating margin improved to 11.3% in Q2 from 11.1% a year ago, while total operating expenses as a percentage of revenues fell to 10.7% from 11.6%. Apparently, adding $1.8 billion in quarterly sales and 8,500 new workers since last year has done little to slow the company down.

Meanwhile, days supply in inventory fell to 6 days from 8 days a year ago, days sales in accounts receivables slid to 36 days from 37 days, and days sales in accounts payable rose to 57 days from 52 days. The improvements resulted in a cash conversion cycle of negative 15 days. Operating cash flow during the period reached $930 million, up 45% from a year ago, and return on invested capital (ROIC) climbed to an unheard of 260% from 217%.

The direct Internet model Dell pioneered is obviously still working, and the company expects a "very healthy" second half. Operating and net margins could fall somewhat in future quarters as Dell attacks the less lucrative consumer and small business PC market, which accounts for only 30% of total revenues, compared to 55% for other players in the industry. The company's product line is expanding, and a Dimension micro tower PC is already selling on Dell's website at a base price of $799. But while the move to sub-$1,000 PCs may scare some, betting against a company that is executing its strategy as well as Dell is right now is a much more dangerous move.

News to Go

Semiconductor wafer fabrication equipment maker Applied Materials (Nasdaq: AMAT) reported fiscal Q3 EPS of $0.61, up from $0.19 last year and ahead of the First Call mean estimate of $0.53. Net sales rose 28% sequentially to $1.43 billion, while bookings of $1.46 billion were 5% higher than in the previous period.

Grocery store operator Food Lion (Nasdaq: FDLNA) is nearing a deal to acquire Northeastern U.S. grocery retailer Hannaford Brothers (NYSE: HRD) for up to $4 billion in cash and stock, The Wall Street Journal reported. Possibly in preparation for the deal, Food Lion announced a one-for-three reverse stock split this morning and the formation of a new holding company called Delhaize America in order to "facilitate acquisitions."

Lucent Technologies (NYSE: LU) is at it again. Unable to keep its stock wallet in its pocket, the telecommunications equipment firm said it will acquire Excel Switching Corp. (Nasdaq: XLSW), a maker of programmable switches for circuit and packet networks, for about $1.7 billion in stock. The deal is expected to be neutral to Lucent's earnings in fiscal 2000.

Web portal Lycos (Nasdaq: LCOS) posted fiscal Q4 EPS of $0.01 (excluding amortization and one-time costs), up from last year's loss of $0.01 per share and ahead of the First Call mean estimate of breakeven results. Revenues came in at $45.1 million, up 29% sequentially and 137% year-over-year.

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