JANUARY 10, 2007
News Analysis
By Louise Lee
Dell's New Lineup May Not Be Enough
The struggling company introduced some attention-grabbing new products at CES on Jan. 9—but will they drive much-needed growth?
After almost two years marked by management turnover, financial woes, and product flubs, Dell seized the opportunity at the International Consumer Electronics Show in Las Vegas to turn on some flash and dash.
As part of his keynote address on Jan. 9, Dell (DELL) Chairman Michael Dell unveiled the Dell XPS 710 gaming desktop, calling it a machine for "serious gamers who want to push performance beyond tested limits." That machine, which sells for $5,499, features a high-tech cooling system that mimics a car radiator and uses components similar to those used in space shuttles.
Dell also announced the Home Media Suite, a bundle of products designed to connect the television, PC, and other electronics. The package includes speakers, a Webcam, a 27-inch flat-panel monitor, a printer, and other related equipment and software—all aimed at making the computer a hub of home entertainment. For Dell, "the task this year is figuring out how to shed its commodity image," says Bob Djurdjevic of Annex Research. "These products are a part of that."
Lingering Problems The new systems are certainly grabbing attention. Whether they'll foster turnaround at Dell, which still gets the bulk of sales from PCs, is an open question. Indeed, the lineup pales in comparison to the suite of products unleashed by Apple (AAPL) at the company's annual Macworld Expo in San Francisco, lifting Apple shares 8.3% (see BusinessWeek.com, 1/10/06, "The Future of Apple").
Dell missed quarterly financial projections for most of the last six quarters. In the most recent quarter, though, Dell exceeded expectations on both profit and margins. The company will release fourth-quarter results in mid-February.
Some analysts aren't optimistic about Dell's prospects for the coming year. JPMorgan analyst Bill Shope downgraded Dell shares to "underweight" and lowered revenue and earnings estimates on Jan. 5. He says the company is "heading for rough waters." Specifically, Shope is projecting that Dell's gross margin will narrow as it will no longer receive favorable pricing from Advanced Micro Devices (AMD) and Intel (INTC) for chips. Additionally, growth in Dell's non-PC business could slow, particularly in the competitive blade-server area, Shope says.
In a Jan. 4 report, UBS Investment Research analyst Benjamin Reitzes underscored Dell's heavy exposure to the slow-growing corporate market, as well as Dell's relatively thin selection of notebook computers for consumers. Both of these issues are likely to constrain revenue growth this year. Sales to businesses comprise about 85% of Dell's total. By contract, Dell's chief rivals Hewlett-Packard (HPQ) and Apple depend far less on selling to corporations and have a wider array of products that appeal to consumers, analysts say. Overall, "HP seems to be gaining more share near term," Reitzes wrote in his report.
Slow Market Growth Making matters harder for Dell, the worldwide PC market is expected to grow only 12% this year, down from a prior projection of 14%, according to UBS. That's partly because corporations may be slow to purchase new PCs that use Vista, Microsoft's (MSFT) new version of the Windows operating system, as workers wring more productivity out of existing systems. And some companies simply aren't impressed enough with Vista to shell out money for new PCs just yet (see BusinessWeek.com, 11/30/06, "Microsoft Vista: Companies Can Wait"). The upshot: "Dell should see little benefit from Vista this year," says JPMorgan's Shope.
As for the new Dell products unveiled at CES, they're certainly on the right track, says analyst Djurdjevic. They're another attempt at cracking the faster growing consumer market, and "gaming is the buzzword" these days, he says.
Yet Dell could still be hurt by its ongoing avoidance of selling in retail stores, where customers can touch and feel before they buy, as many want to do when they're spending thousands of dollars on a machine. Those who buy the new systems sight-unseen, over Dell's Web site or over the phone, are likely to be "the sophisticated, educated buyers who don't need to see it," says Djurdjevic. Dell can only hope that there's enough consumers like that out there.
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