As recently as this spring, Dell (DELL) was trumpeting an ambitious growth plan to reach $80 billion in annual revenue. Dell CEO Kevin Rollins even set a timetable for reaching the goal: The company would hit its sales target in "three to four years," or by the beginning of 2009 at the latest.
While Rollins said he's holding to the dollar figure, he stopped short of sticking to the timetable. "We have not backed off the $80 billion," Rollins said on a Nov. 10 conference call discussing earnings for the fiscal third quarter. But, he added, the company will give "no timeline."
"A HEALTHY GROWTH RATE." Rollins repeatedly said Dell expects growth of 9% to 11% for the current quarter, though he declined to make forecasts for further out. That was a downer for investors clamoring for a firm indication that Dell can ratchet back up to 13% growth -- the rate needed to reach the $80 billion goal by the initial timetable. "We think it's excellent," Rollins said of the outlook. It's "a healthy growth rate for a company our size."
Some investors beg to differ. That pace is in line with the larger stock market, and investors over the years have come to expect more from Dell, the world's No. 1 maker of PCs. "We believe that revenue guidance under 10% is likely to negatively impact the stock," Sanford C. Bernstein analyst A.M. Sacconaghi wrote in a Nov. 9 research report. The shares slipped in extended trading, shedding 29 cents, or 1%, to $28.92.
For the fourth quarter, which ends Feb. 3, Dell is projecting sales of $14.6 billion to $15 billion, indicating an increase of 8.5% to 11.5% from a year earlier. That's less optimistic than the $14.9 billion increase that Wall Street had been projecting on average. That's also a slowdown from a year ago, when fourth-quarter revenue rose 16.9% from the same period in 2003. Dell, based in Round Rock, Tex., expects per-share earnings of 40 cents to 42 cents. Analysts on average had expected 42 cents.
DECLINING PRICES. "Growth is slowing, and that scares people," says Jason Maxwell, a portfolio manager at TCW, which owns shares of Dell. The pace of quarter-over-quarter revenue growth has steadily fallen for the last six quarters and is now on the brink of sinking into single-digit territory. In the consumer business, in particular, other players are willing to match or often beat Dell on price.
"Part of Dell's problem is that others are being more like Dell," says FTN Midwest Securities analyst Bill Fearnley Jr. And while Dell is seeing brisk unit growth in notebook computers, industrywide in the U.S., prices are falling. "High average selling prices in notebooks have fallen apart," says Steve Baker, analyst at researcher NPD Techworld.
Revenue in third quarter, which ended Oct. 28, was $13.91 billion, up 11% from a year ago. Excluding costs for layoffs, an inventory writeoff, and fixing some OptiPlex desktops that have a bad part, Dell posted income of $944 million, or 39 cents a share. Including that charge, net income was $606 million, or 25 cents a share.
TOP-SHELF MODEL. Now that it has lowered the bar, Dell is pulling out all the stops to achieve sales goals. One key strategy: Dell in recent months has begun rejiggering its product mix to offer pricier machines. In September, it relaunched its line of higher-end XPS machines aimed at affluent customers and gaming enthusiasts. In the third quarter, sales of the XPS line grew at 30% to 40% from a year ago, about double the rate of Dell's cheaper machines.
The XPS line also helped raise Dell's average selling price for PCs by about 3%, bucking the industry trend of declining prices. To balance out its expensive computers, Dell still sells lower-priced machines in the $500 range. With that wide range of prices, "We'll have a healthy fourth quarter for the consumer business," insisted Rollins.
Dell also is intent on improving its reputation for customer service, which has slipped of late. It's adding call centers and testing a service that lets a Dell technician remotely tap into a customer's computer through a broadband connection. While improving Dell's service reputation could bolster sales, Chief Financial Officer Jim Schneider noted that the increased spending will likely narrow Dell's operating margin in the fourth quarter from the preceding period.
WELCOME, AMD? Another tactic in Rollins' arsenal: creating the perception Dell is wavering in its strategy of using Intel (INTC) chips only. Some analysts have noted that in both the consumer and business sectors, Dell may be putting itself at a sales disadvantage by sticking exclusively with chips from Intel. Its competitors all sell machines with chips from both Intel and Advanced Micro Devices (AMD).
Dell has recently begun selling individual AMD chips on its Web site -- not the first time Dell has flirted with AMD. In 2001, Dell surveyed customers to gauge interest in both AMD's now discontinued Athlon and Duron processors. In 2004, after Intel suffered a series of manufacturing snafus and delayed product launches, Rollins in interviews and public comments said Dell would "probably" and "eventually" add AMD. Later, he reiterated Dell's commitment to Intel.
Analysts and industry insiders believe Dell plays the AMD card to wring better prices and to attain influence over Intel's plans for its chips. Indeed, Intel recently delivered dual-core server chips ahead of schedule after Dell rivals HP (HPQ), IBM (IBM) and Sun (SUN) began to make inroads in that market using AMD's Opteron chips.
CHINA SALES. While Dell may eventually be forced to adopt AMD chips because of competitive pressures, the company's super-efficient PC assembly operations could suffer if it were to offer both AMD and Intel chips. The two chipmakers use different packaging and components that would require Dell to segment its lines. Asked on Nov. 10 if Dell is considering using AMD chips, Rollins said only, "no, not right now."
Rollins went to great lengths on the conference call to emphasize Dell's strength in other regions and product areas. Third-quarter sales outside the U.S. rose 20% from a year ago. Revenue in the Asia-Pacific region, including Japan, also grew 20%. China, in particular, saw unit growth of 46%.
Revenue from computer services sold to businesses and big corporations jumped 36% to $1.2 billion. Storage machine revenue rose 35%.
"WE CAN DO BETTER." Bright spots aside, Dell faces no shortage of challenges as it tries to step up growth. Competition is relentless and rising. Besides Dell's longtime competitors, including Hewlett-Packard Co. and Gateway (GTW), smaller players are aggressively moving into Dell's space, too. Alienware, for one, which sells mostly high-end machines that compete head-on with Dell's XPS line, saw sales rise 50% in the year ended in September, says CEO Nelson Gonzalez.
Asked by one conference call participant if Dell is "complacent," Rollins responded that the sentiment within employee meetings is, "We can do better." He added that "the intensity has ratcheted up in the last couple of quarters." And if growth keeps slowing, the intensity is sure to climb further.
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Lee is a correspondent in BusinessWeek's Silicon Valley bureau
with Cliff Edwards in Silicon Valley
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