Technology

From Servers to Service: Dell's Makeover


Finally! That was the response by many investors and analysts to a turnaround plan unveiled by Dell (DELL), the world's biggest computer maker, on May 18. The Round Rock, (Tex.)-based company disclosed what it's doing to improve customer service and product quality while shaving billions of dollars in costs. It's all part of grand plan to reignite growth that stalled in 2005 after Dell outperformed rivals for years.

Chief among Dell's new steps: later this year it will begin using Opteron chips from AMD (AMD) in its high-end line of servers, ending a strategy of using machines based on chips made by Intel (INTC). Many customers and industry analysts consider AMD's chips to be more powerful than those from Intel, which has been Dell's sole chip supplier for decades. Cindy Shaw, an analyst at Moors & Cabot Capital Markets, says it's the right decision. The move will likely stimulate sales not only of the hardware, but also demand for high-margin maintenance contracts, she says. Dell share rose 4.3% to $24.99 in extended trading (see BW Online, 5/19/06, "AMD Inside").

CHIPS AREN'T EVERYTHING. It will take a lot more than AMD server chips to right the Dell ship, though. "It will not solve their greater challenges," Shaw says. Dell Chief Executive Kevin Rollins acknowledged that Dell's AMD-based servers account for "a fairly small category in terms of units. "And it's unclear how Dell's agreement with AMD affects its relationship with Intel, which gives Dell price breaks and subsidies that some analysts estimate to total as much as $1 billion a year. Intel is expected to continue to supply "the vast majority" of Dell's chips, Rollins said.

Although Dell's open endorsement of AMD, after decades of buying chips only from Intel, raises the possibility that Dell may purchase AMD chips for other product categories, some analysts have said that selling more AMD-based machines would bring much more complexity and cost to Dell's business, as it would have to operate additional design, manufacturing, and marketing staffs.

Executives also peeled back the curtain on a plan for improving how Dell caters to customers, an area where it has suffered significantly in recent years. This year, Dell is spending more than $100 million on improving service. Some of that is going to hire new support workers, retrain existing ones, and expand new offerings, such as a remote-repair service. Dell says it has hired more than 2000 sales and support workers in the U.S. Already, Rollins says, phone-wait times are down by 50%, although he didn't say how many minutes customers still have to hold. "Customers are more concerned about service and support," he said.

CAUTIOUS RESPONSE. Investors welcomed the moves, but cautioned the impact won't be felt immediately. "It'll take a while to repair the reputational damage," says Jason Maxwell, analyst at TCW, a large Dell shareholder. "It's a longer-term fix. In the short term, it doesn't help Dell make its quarterly targets."

To cut a targeted $3 billion costs, Dell said it's planning to make changes in its components and materials and in its factories. But those cost cuts may not provide much of a boost to margins and profits, since many cost reductions may simply be offset by the price reductions on its products. "They're focusing on revenue growth, service and support, and product quality, but they're not focusing on earnings growth," says Shaw at Moors & Cabot Capital Markets.

Indeed, Dell plans to continue pricing its machines aggressively, especially since lowering pricing in some past quarters didn't sufficiently stimulate unit growth. But Rollins insisted, "We will see the growth.... It's hard to scale costs and investments if we shrink" in sales, he said.

SLOW GROWTH. Dell's sales aren't actually shrinking, but they're certainly growing more slowly than they were a couple of years ago. Dell said sales for the quarter ended May 5 were $14.2 billion, an increase of just 6% from a year ago. Net income fell by 18% to $762 million. Dell on May 8 warned investors that its results would miss expectations (see BW Online, 05/09/06, "Dell: Burned by a Fire Sale")

In a surprising break with tradition, Dell also said it isn't going to offer any more quarterly guidance. Encouraging investors to look to the long term "is more appropriate for a company our size," Chief Financial Officer James Schneider said. "So, we're ending the practice." He said Dell will provide more details and numbers at its analyst meeting in September. Until then, investors and analysts are on their own in figuring out just where Dell is in its long-awaited turnaround. "The good news is, they're acknowledging that they're in trouble," says Shaw. "The bad news is that the turnaround is not going to be quick."


Steve Ballmer, Power Forward
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