Technology

Dell's Doubtful Turnaround


Amid ongoing investigations, management changes, and a rare decline in sales, the computer maker remains mum on its strategies for the future

Struggling Dell (DELL) provided a glimpse into just how difficult its turnaround will be, reporting disappointing fourth-quarter results that include its first quarterly sales decline in five years. Adding to the uncertainty surrounding the world's second-largest PC seller, the company didn't shed any light on months-long investigations by the Securities & Exchange Commission and the U.S. Attorney for the Southern District of New York into certain accounting matters, as some analysts had been expecting. Dell is conducting its own internal investigation.

Investors will likely have to wait many months for any financial improvement. In a press release, Dell says that "in the next several quarters, the company expects that growth and margins will continue to be under pressure as it implements and refines" its strategies. "That implies that Wall Street's current expectation of things improving soon might be optimistic," says Brent Bracelin, an analyst at Pacific Crest Securities.

Dismal Fourth-Quarter Results

For the current fiscal first quarter, Wall Street analysts are projecting Dell will post revenue of $14.28 billion, an increase of about 1% from the prior year. The company, which doesn't provide specific financial guidance, wouldn't elaborate on its press release and for the second consecutive quarter didn't hold a conference call to discuss results with analysts. In after-hours trading, Dell shares fell 2.17%, to $22.51.

The Round Rock (Tex.) company says net income came in at $673 million, or 30 cents a share, for the fiscal fourth quarter ended Feb. 2. That result is down 33% from a year ago, when Dell reported a profit of $1 billion, or 43 cents a share. The most recent results include a charge of $89 million related to the ongoing investigations and a gain of $184 million related to reducing employee bonuses. And in its first revenue decline in five years, Dell says sales fell 5%, to $14.4 billion, in the quarter. (The prior decline occurred in the period following September 11.)

The company says unit shipments of desktop computers fell 18% and shipments of laptop machines grew just 2% from a year ago. Revenue in both segments fell. "People were looking for a bad quarter, and it was a bad quarter," says Bracelin. Dell had warned on Jan. 31 that results for the quarter would fall below analysts' expectations.

Rising Costs, Declining Market Share

Analysts pointed to other red flags as well. Despite the decline in sales, Dell's head count was 82,000, up 18% from a year ago, suggesting a rise in fixed costs relative to sales volume. Much of those hires have been in Dell's assembly plants and call centers. In the last year, Dell has ramped up a new plant in North Carolina, a move that's turning out to be ill-timed given the dropoff in demand.

Dell has historically relied on growth from the corporate desktop market, which is currently less robust than the market for consumer machines, particularly laptops. The company is losing ground to other competitors, most notably Hewlett-Packard (HPQ). In the third quarter of 2006, HP overtook Dell as the largest PC seller as measured by market share, according to IDC Research. Additionally, Dell is suffering from past missteps that have sullied its brand name. "Dell has some rebuilding to do on its quality image," says Bill Fearnley, analyst at FTN Midwest Research Securities, citing last year's recall of batteries in some Dell laptops and the discovery of defective parts in some of its Optiplex desktops the prior year.

The lack of details emerging from the company is frustrating to analysts and other observers. "Investors want to know exactly what are the strategies and tactics" Dell is undertaking, says Fearnley. "There are still more questions than answers." Citing the SEC probe, the company has yet to submit its detailed quarterly filing for last year's fiscal second and third quarters and says that all results for those periods, as well as the most recent quarter, are preliminary.

C-Suite Overhaul

While the company sorts out its financials and accounting, Michael Dell, who was reinstated as chief executive on Jan. 31 following the departure of Kevin Rollins, is pursuing an operational overhaul. He is working to "increase efficiencies, improve execution, and transform the company," according to the company's press release. Dell has recently been on a hiring binge, but now has to integrate a number of new executives into the company, including high-profile veterans Mike Cannon and Ron Garriques, brought in from Solectron (SLR) and Motorola (MOT), respectively (see BusinessWeek.com, 2/16/07, "Dell's New Blood: Cannon, Now Garriques"). "It will take time to realize the future benefits of the improvements we are making today," Dell said in the earnings release. What's less certain is just how much time Wall Street is willing to give him.

Lee is a correspondent in BusinessWeek's Silicon Valley bureau.

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