Dell: No Relief in Sight

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Dell's share of the server market declined to 11% in the first quarter, according to market researcher IDC. Industrywide, server sales declined 24.5% during the quarter. In the 12 years that IDC has been keeping track, it was the worst period for sales of the machines that help companies run data centers and corporate networks.

Even as sales decline, Dell has been preserving profit margins through aggressive cost-cutting and refusing to lower prices too steeply. Gross margins were 17.6%, vs. 18.4% a year earlier. Dell has resisted cutting prices as sharply as other PC makers have to gain market share, Broadpoint AmTech (BPSG) analyst Dinesh Moorjani said in a May 26 research note. In February, Dell said it will accelerate cost reductions to pare annual expenses by $4 billion a year by January 2011, taking an additional $1 billion out of its yearly budget.

On the Acquisition Trail

Investors are keen to see how quickly Dell will pull the trigger on acquisitions to gain scale and move itself into more profitable pockets of the IT market. Dell executives said the company, flush with $10.13 billion in cash, is on the hunt for acquisitions, especially in the area of services that help customers install and manage hardware and software. "Asset prices are getting pretty attractive, and certainly we're looking at expanding inorganically," CEO Dell told analysts during the call.

The company has made 10 acquisitions in the past three years, and only one, storage company EqualLogic in 2007, has exceeded $1 billion in price. Dell may need to take bolder steps to compete with IBM and HP, which are strong in services. "The question is, do they do more of what they do well or change strategy?" says Paul Deninger, vice-chairman at investment bank Jeffries & Co. (JEF). "That's a decision the organization needs to make."

Dell is getting poised to make those very calls. It's trying to hire a mergers-and-acquisitions chief. CFO Gladden said Dell will use acquisitions to build its $1.2 billion services business. "It isn't like we're just sitting back watching other companies do consolidation," he says.

Dell's stock is down about 47% in the past year, declining further than those of IBM, Apple (AAPL), HP, and Intel. A rise in PC buying when Windows 7 arrives may help mitigate Dell's woes. But investors will also be looking for signs the company is willing to spend its cash hoard to enter new markets and broaden beyond the bruising PC market, where prices continue to fall.

Ricadela is a writer for BusinessWeek in Silicon Valley.

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