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Reality Bites...at Dell


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August 12, 2005

Reality Bites...at Dell

Peter Burrows

Funny that MTV's Real World is taking place in Dell Inc.'s hometown of Austin, Texas this year. In fact, maybe the cast should make room in the hot-tub for company chairman Michael Dell and CEO Kevin Rollins.

Why? Because based on the quarterly financials announced yesterday, analysts are concerned that Dell is finally getting a taste of the harsh reality other PC makers have been dealing with. For years, Dell's rivals have struggled to find new customers willing to pay them enough to make a decent profit. The problems started when PC prices plunged in the late 1990s. While the industry posted huge unit growth for a while, revenue growth didn't keep pace--and profits all but evaporated for PC makers including Compaq, Gateway, Hewlett-Packard, IBM and many others. Remember Packard-Bell?

Only Dell avoided the problem. Thanks to its hyper-efficienct ways, it enjoyed net margins far higher than its rivals. That meant it could log cushy profits on customers that were just break-even for that hapless gang. The result: Dell has spent the start of the 21st century feasting on market share, and posting the kind of top and bottom line growth to keep it on Wall Street's must-own list.

Which brings us to yesterday's news. Clearly, Dell is still a fabulously successful company. It's earnings grew 28%, and sales--while slightly low of expectations--still grew a brisk 15%. But the specter of slower revenue growth in the future has analysts worried that even Dell is running out of easy pickings--that even it will have to break a sweat to find customers willing to pay enough for plain old PCs to keep its financial formula in good working order.

As with almost everything these days, there may be a "rise of Asia" component to this story. Laura Conigliaro, Goldman Sachs' excellent hardware analyst, points out in a report titled "A Miss With Much Wider Implications," that rivals such as Acer, Lenovo and BenQ are pushing prices down farther than even Dell may care to match. What's more, much of Dell's growth is coming from Asian customers, who typically buy cheaper configurations.

01:33 PM

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>> profits all but evaporated for PC makers <<

Just to clarify...Windows PC makers, Apple seems to be doing just fine. :-)

Posted by: PXLated at August 12, 2005 03:34 PM

PXLated, you get to keep the smiley emoticon only if you're an Apple share holder.

If you're not, and are an Apple user only, then guess what...you're paying higher prices to keep apple in the pink...that might turn that emoticon around 180 degrees.

Posted by: michael parekh at August 13, 2005 12:24 PM

You must pardon my ignorance on this one,but someone needs to explain to me the merit of "being in the pink" as I have only heard of black or red. Maybe it is that I am an engineer and only know of profit or loss, not pink (pross? lofit?)...

Posted by: BuckFinski at January 20, 2007 11:15 PM


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