"This is a new Dell," said Michael Dell, chairman and CEO of the PC and consumer electronics company that bears his name, during a conference call Tuesday to discuss the latest quarterly results. I wasn't very convinced and I am not sure investors bought Dell's self-proclaimed verdict either.
Certainly, Dell should have chosen a better time to proclaim the rebirth of his company. It didn't help that the company's fiscal third-quarter results were less than stellar -- revenue was mainly unchanged from the year-ago quarter and fell slightly from the fiscal second quarter. The outlook for the full fiscal year wasn't too exciting either.
"Given the uncertain macroeconomic environment and complexity in working through the industry-wide hard drive issue, the company is trending to the lower end of the range of its revenue outlook of 1 to 5-percent full fiscal-year growth," the company said in a press release.
Nevertheless, Michael Dell was somewhat right in saying Dell Inc. has made major changes over the last year to improve financial performance and sharpen its focus on new market segments. It consistently exceeded analysts' consensus financial estimates over the last four quarters and for the three months ended October 28 posted net income of $893 million, up from $822 million in the year-ago quarter.
Sales in critical market segments, especially in the non-consumer segments that include servers, storage, and networking, were robust, climbing about 8 percent sequentially to a record $4.7 billon and confirming the company's shift of focus. In fact, CEO Dell told analysts the company was going to pull back from the low-end, low-margin, but high-volume PC market to concentrate on higher-margin offerings.
"We're choosing not to participate in low-value opportunities, which have put short-term pressure on revenue growth but have been a real driver of our expanded margins and growing earnings," Dell said. "We continue to believe that increasing our share of industry profits is the right strategy."
The company is making other even more fundamental changes to its operations, too. Dell, which historically spends about 1 percent of its revenue on research and development, has been slowly raising this as it makes investments in consulting services and in a bid to improve sales to higher-margin enterprise businesses. For the ongoing fiscal year, the total R&D expenditure could be "at almost a billion-dollar annual run rate," according to the CEO. For this company, that's almost revolutionary: The highest Dell has spent on R&D in the last five years was $663 million in fiscal 2009 when it represented 1.1 percent of sales. By comparison, R&D at $220 million in the fiscal third quarter was about 1.4 percent of sales.
Will these changes help make Dell the "new" company its founder believes it already is? They are already slowly transforming Dell, but if the company truly wants to fundamentally change the perception in the market that it's a plodding performer it will have to do much more. Dell is still largely a hardware company at a time similar enterprises are moving to services and consulting. Services and software-related sales have been steadily climbing, though, rising to $3.1 billion in the latest quarter, up from $2.9 billion in the year-ago quarter, but this still represents less than one-fifth of total sales.
The transformation Dell seeks is also getting whiplashed by events out of the company's control. Recent natural disasters, including the flooding in Thailand, will hurt Dell and many of its rivals. Coupled with the current economic malaise worldwide, Dell may not really enjoy the strong growth it needs to prove to investors, suppliers, and analysts that it has emerged from the funk the company sank into at the end of fiscal 2010 when revenue tumbled more than 13 percent from the preceding year.
This new Dell shows promise of what may come, but that process is far from complete.