Friday, February 17, 2006

“I’m Struggling to Understand…”

When one of Wall Street’s Finest begins a question on a conference call by saying “I’m struggling to understand…” you know there’s trouble brewing.

Wall Street analysts hate to express anything but goodwill towards the companies they follow—the better to retain access to the management of those companies. Especially those companies which generate banking fees.

Which is to say, of course, every public company in America.

Thus, when one of Dell’s biggest boosters began a question on last night’s Dell call that way, you knew it was going to be a long, ugly evening. And it was.

Among the questions asked by the disappointed analysts were the following:

“I’m struggling to understand why gross margins deteriorated so significantly, both sequentially and year-over-year…”

“Do you still feel the [direct] model has advantages [over HP]?”

“Should we assume that the new, lower operating margins are really part of a process of resetting the bar?”

“Why are the new lower margins not driving higher revenue...?”

“How would you assess your own execution this quarter?”

“When should we see the consumer business basically bottom out?”

“I’m a little bit puzzled by the effects of the 14th week [in the quarter]…”

“Is it fair to say that HP is making it a lot more difficult for you guys to grow on the printer side, and is it a really big disappointment for you?”

I must admit that, personally speaking, I’m struggling to understand why Wall Street’s Finest expected so much more than Dell delivered last night.

For one thing, Mark Hurd has clearly stopped the hemorrhaging at HP, which used to be the SPECTRE to Dell’s James Bond—grand plans of World Domination that always ended in failure, big explosions, and Bond getting the girl.

For another thing, Dell’s service problems appear to be so widespread that my own bad experience (see “Dell Screws Up a Good Thing”) is a pretty good reflection of the decline in Dell’s brand name.

Here’s how Dell CEO Kevin Rollins wrapped up the call last night:

“Our focus is going to be, as we mentioned at the outset, continuing to work on our customer experience…”

My advice—not that anybody at Dell is asking—is this: less time on conference calls with Wall Street’s Finest, more time on customer calls.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


pondering said...

The Dell vs. HP comparison is somewhat flawed in that HP has many more facets to drive revenue than Dell. Dell is primarily a PC company whereas HP has more to offer.
HP's customer service is no better than Dell's. Storage is where the dollars reside today and Dell doesn't penetrate that market by selling desktop and laptop computers. When was the last time a IT Director said...hey let's call Dell for our Storage upgrade? Sure Dell could attempt to digest other companies like Compaq eating DEC and then being eaten by HP but how does builing higher costs drive higher profits? Bottom line in my mind is HP is not out of the shallow water yet.

yoyodyne said...

Is it me, or is Dell simply turning into Boeing?

Boeing has one competitor, Airbus, Dell has several well-financed competitors at home and abroad.

Note Dell now trades cheaper than Boeing!

Gone to the blogs said...

Jeff, I hate to accuse you of kinda living in the past, but...the sell side nicey-nice game with management has really changed. Long gone are the days of the sell side kowtowing to the investment banking mandate. Nowadays, it's all about befriending management teams so that they will travel with the analyst to visit accounts, appear at conferences, etc. Every guy I know on the sell side is playing this game. The investment banking tango is *so* 1999.

Chlngr said...

I'm puzzled that you would spend so much time on analyst comments when you so rightly view the collective intelligence of analysts to be inferior. After about the 12th question regarding the impact of the 14th week, it became a little old. It's still a waste of time reading about the stupid analyst questions this morning.

po boy said...

whoa chln, what's up your butt... lol...

ron s miller said...

Dell will decline as the PC business looks more and more like the TV business. One day, we may have PC's that don't need regular service center calls.

Chris Paulse said...

gone to the blogs: You make an interesting assertion. To what extent is there a dichotomy between affiliated and unaffiliated analysts in the goal (and success) of obtaining access to corporate managements? Here affiliation can be assumed to be the ability of the firm to conduct equity or debt financing, or broker M&A (or a track record of doing so) for the company.

Affiliated analysts tend to have better accuracy in earnings forecasts.

Jeff Matthews said...

To All Readers:

My sincere apologies for the idiotic Yahoo Message Board-Style commentary from "bpl1000" that appears in the discussion about Dell above.

However, I am keeping this idiotic posting up, for now, so that all readers will understand precisely the type of Yahoo Message Board-Style commentary that is not welcome on this blog.

Any future commentary that utilizes inane, lazy, meaningless Message Board-style phraseology along those lines--especially including, but not limited to, shortcuts such as "LOL"--will be deleted.

I am not making this up.

As to the assertion by "the irrational investor" that "affiliated analysts tend to have better accuracy in their earnings forecast--well, I'd like to see the data supporting that claim.

For starters, over what period of earnings are we talking--the almost useless next quarter, or the more important two-to-three years out?

The big money in stocks is not made in knowing whether Dell beats the next quarter by a penny, but whether Dell has something going for it or against it that will cause the Wall Street Consensus to be wildly exceeded or missed in a two to three year time period.

Its_strange said...

TTWO...In the SEC / TTWO settlement Corner Distributors and Big Apple distributors were parking games for TTWO.. A little googling will show you both are located in the Bronx . Both on Merritt ave and both ( Flair Displays , inc seems to be in the old Corner building ) got help from the New York Industrial Development Agency . A little more googling will also tell you the Gothamcityentertainment is another video game distributor which is located in Big Apples building and it is also a ticket scalper in North Bergen NJ . ....Its more bizarre. Alliance Distributors ( ADTR.OB ) is located a few miles from Big Apple and seems to be made up of old TTWO and Corner people. ...TTWO's Eibeler has ADTR option and Big Apples's Eric Markowitz has TTWO options. ...There more but i'm not qualified to sort it all out. ...But if TTWO folds that might free up shelf space for real video companies just as the hardware issues are resolved..A industry outlook without a TTWO just might be worthwhile..

4 weeks and still no word what caused the fire at 575...still no word what all that "extremely valuable" artwork was doing in TTWO's office

Its_strange said...

and i should point out TTWO seems to have moved Jack of All Games ( thier distribution company ) out of Queens NY ( 2 blocks from ADTR ) ....I guess there was no need for them in NY if they could do business with Corner and Big Apple ...And if you guys get bored google "Richard Genovese" ...He owns a ton of ADTR

Chris Paulse said...

Sorry for not supporting the claim with evidence.

Here you go.

The study is of course statistical, and researchers like these tend not to go much further than I/B/E/S and regressions to determine the true source of the effects. I thought this forum might be a place to help add color to (or refute) the hypothesis.

Chris Paulse said...

Jeff writes:
"The big money in stocks is not made in knowing whether Dell beats the next quarter by a penny, but whether Dell has something going for it or against it that will cause the Wall Street Consensus to be wildly exceeded or missed in a two to three year time period. "

It should be pointed out that big money can be saved with accurate forecasts of near term earnings.

Chris Paulse said...

I was wondering if anyone could explain the economics of I/B/E/S. Given its price, and the fact that transaction and distribution costs appear to be fairly minimal, I was assuming that it acts as a source of royalty payments for the firms that offer earnings estimates. Of course, this probably isn't close to the truth, although it does seem like a fairly legitimate way for it to work (if it could be altered to follow the proposed changes to the way cable TV content is distributed).

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po boy said...

My apologies if I diluted the quality of this particular discussion with "lol" and maybe another choice word or two.

But to try to make up with a meaningful contribution, here's this for thought.

I don't think the problem is a DELL specific problem. The US computer/printer hardware industry is inundated from cheaper and just as good alternatives. I would be surprised if Lenovo and Samsung doesn't put a dent in DELL's or HPQ's earnings for future quarters to come. 2-3 years sounds like a good time frame to me.

mh497 said...

The other day when I was listening to a Bloomberg radio interview discussing Dell's earnings, the Bloomberg guy offered a personal anecdote about a bad experience with a Dell hard drive in his daughter's laptop. How's that for bad advertising?

I have a friend with a similar bad experience.

Dell better get on the stick, and quick.