Rahul Sonthalia and Chetan Solanki co-authored the note.
DELL Inc. (NASDAQ:DELL), which prided itself on its direct-only channel, has ramped up its retail channel sales in the past 2-3 quarters after losing out significantly to its arch-rival Hewlett Packard Company (HPQ) since 3QCY06(See Earlier Note on HPQ Vs Dell). The impact of the adoption of this new business model can be gauged by changes to certain key financial/operational metrics. read more…
Aalap Vaze also contributed to this note
Sun Microsystems, Inc. (JAVA) continues its resurrection of earnings by treading into positive turf and achieving an operating profit in FY07, the first time since FY01. Sun recorded three consecutive quarters of positive EPS in FY07 and is now targeting an operating margin of at least 10% in FY09.
Using the Gridstone platform, we have analyzed whether Sun’s performance matches with the growth objectives spelled out by CEO Jonathan Schwartz, and we conclude that the long-term targets can be achieved by cost containment rather than revenue growth. We also set out to answer questions on whether this turnaround is a temporary blip, not having signs of a sustained performance, or whether this is a true resurgence.
When Schwartz took over as CEO, he outlined five broad objectives:
1. FY07 revenue growth in low-to-mid single digits
2. FY07 gross margin of around 43%
3. Operating margin of at least 4% in Jun-07 quarter and long-term operating margin target of 10%
4. FY07 operating expenses of $5.6-6 B
5. Reduction in workforce by 11%-13% by FY07.
We look at Sun’s performance against each of these objectives and indicators that could substantiate Sun’s ability to achieve the FY09 target of 10% operating margin.
read more…
Recent trends in revenue growth, unit shipments and operating margin point to HPQ overtaking DELL in the battle for supremacy in personal systems. Barring a reversal of this trend, we think that HPQ is positioned to capture the majority of growth and eventually prime position in this important market.
Our Gridstone analysis over the past eight quarters shows that DELL’s revenue from Desktop PCs and Mobility Systems has declined 0.6% CAGR. During the same period, HPQ’s revenue from Desktop and Notebook systems has grown 7.7% CAGR (See Exhibit 1.) Most importantly, HPQ captured the majority of growth in the notebook segment, increasing revenue a whopping 21.7% CAGR – almost double DELL’s respectable 12.2% mobility growth rate. If these growth rates persist, we anticipate that HPQ will surpass DELL in notebook/mobility systems revenue during 2007.
read more…
