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Is This Really a New Dell?

“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 {complink 1544|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.

28 comments on “Is This Really a New Dell?

  1. Ariella
    November 16, 2011

    As you say, Bolaji, we'd have to see more of how it operates to judge whether or not Dell has succeeded in transforming itself. But increasing the investment in research and development, certainly, is a good start and a necessary move in the direction of innovation.

  2. bolaji ojo
    November 16, 2011

    Ariella, Investors are also in wait-and-see mode. Dell's stock price fell 3.2 percent today although that may not necessarily be a reflection on the company as the broader market indices also declined. What's certain is that Dell's story was once captivating. At one time it was known as the King of build-to-order and online/phone sales. That period has long passed. The company no longer has a compelling story such as Apple's for instance (which company does?) but maybe the increase in R&D will propel it to that fame.

  3. Ariella
    November 16, 2011

    Yes, another area they should look into is improving customer service. I know people who have waited on the phone for an hour trying to work through an issue.

  4. AnalyzeThis
    November 16, 2011

    @Ariella, but it seems as if improving customer service is pretty low on their priority list… a lot of the customer service bandwidth is likely eaten up by people who bought those low-end machines: they're exactly the type of people that probably require additional help.

    Anyhow, Dell has evolved and changed over the years… but they're not exactly re-inventing themselves completely. And to some extent, they don't need to do anything THAT drastic…

  5. stochastic excursion
    November 16, 2011

    That's true since computer hardware has become a mature technology.  It's likely they can rely on Intel and other microprocessor makers to drive board layouts.

  6. electronics862
    November 17, 2011

    Dell's customer service is not that good. Every time, the same situation no body can help and so they transfer you to a thousand people, and you spend hours on the phone..many consumers have switched suppliers in the past year due to poor customer service experiences..Dell has to improve alot in customer service..

  7. mfbertozzi
    November 17, 2011

    Well, that topic has been discussed several times and usually vendor's position was (honestly, as per what understood) “while our products are cheapest in the market, you can't expect also best support”. Do people agree with?

  8. Himanshugupta
    November 17, 2011

    Dell said that he will pulling back from the low margin, low end products to focus on high margin products. Also they are focusing on consulting servies. I think they will also focus on cloud services. WAIT, I HAVE HEARD THIS BEFORE…IBM, HP and now Dell.

    Are US companies facing a tough competition from the Asian companies in the low end product that they want to move away? Or there is just not enough room to grow in the low end segment? Also, when these companies will realign their strategy and move to the high end and high margin products then do we expect a vaccum that would be filled by Asian companies?

  9. jbond
    November 17, 2011

    Dell seems to think that by reducing their low margin high volume offerings and focus on larger margin products will save the company. This is going to be a “wait and see” effort for sure. With the stock prices dropping after the announcement, it would appear the investors aren't too certain about this philosophy either.

  10. saranyatil
    November 17, 2011

    Ariella,

    I have been using Dell laptops for long time till now but have not faced any problems with customer care till now. they are far better than any other company.

    But i feel now they are target would be on how they are going to increase their sales and their market income.

  11. bolaji ojo
    November 17, 2011

    Ariella, The issue of low-margin versus high-margin business is one that has dogged the industry for a long time and will continue as commoditization erodes pricing. Manufacturers must justify high spending on R&D, selling, general and administrative expenses and manufacturing costs but consumers also demand lower pricing all the time (WalMart makes a good business out of this desire) so should a company serve only the high-end of the market to gain higher margins or serve the two ends to assure high volume?

    It's important to play in both ends in my opinion. That's why I like Apple's strategy of migrating older products to the lower pricing ends while revving the product innovation engine to introduce new, higher-margin products. This enables a company to keep its name alive in all market segments.

  12. Ariella
    November 17, 2011

    @DennisQ Actually, what I had in mind was not the user of a home PC. I was thinking of my husband's experiences in network support at major financial institutions. When there were problems with Dell products, he sometimes had to waste a lot of time on the phone getting nowhere.

  13. Ariella
    November 17, 2011

    @Bolaji Yes, if you can appeal to a wide range of budgets, you do increase your customer base.

  14. bolaji ojo
    November 17, 2011

    Himanshugupta, You nailed it, down to the last jot. One company's low-end is another company's high-end. Companies that don't have the resources to introduce new tech-laden products will always enter with low-end products first and possibly drive out bigger rivals. On the other hand, some of the bigger companies may be able to take the blows and remain in the market. It depends on their overall strategy.

    In the case of Dell, though, the company has never been known as a high-end OEM. It's not Apple by any leap of our collective imaginations so I believe it will have to keep repeating its mantra of moving to the high-end in order for the market to accept this. It's also certain that an about-face from this policy could be detrimental to the company's performance.

  15. Hawk
    November 17, 2011

    Ariella, Yet, the sale of servers, workstations and other enterprise computing applications is where Dell can get the higher margin it so much desires. If it is leaving current customers disappointed, as with your husband, what's the incentive for others to follow. Perhaps his experience is not typical for Dell's other enterprise customers but having even a few dissatisfied customers is something the company should remedy.

  16. Barbara Jorgensen
    November 17, 2011

    Dell's doing the right thing by increasing R&D yet it doesn't sounds like a lot in terms of percentage of revenue. Dell was also a transformative company when it came to the supply chain by embracing BTO and JIT as early as it did. A combination of new products and revolutionary internal practices–although I don't know what they will be–could put Dell back in the leadership position it has long enjoyed.

  17. Mr. Roques
    November 17, 2011

    Dell is following IBM's footsteps, leaving the highly competitive low margin, high volume PC sales and going for enteprises and their back end devices. Is that the way they are going or did Mr. Dell said they are going to try something in the tablet industry or the PC market?

  18. t.alex
    November 18, 2011

    What will the R&D money be spent on? I guess it will be more on software and services.

  19. itguyphil
    November 23, 2011

    Dell has really improved in the recent years. In the beginning, they were pricey and reached only the sophisticated. But now, Dell is more focused on all levels of people, particularly in laptops. But if the different flavors of tablets are introduced, it will also increase its market share.

  20. Kunmi
    November 24, 2011

    Dell has infiltrated many companies and healthcare systems through their supply chain. Most institutions engaged in using dell computers and accessories. This is good for Dell. Hope they keep up with the Quality and reliability. Any deviation will be a serious disaster to dell products.

  21. Taimoor Zubar
    November 26, 2011

    I don't think I'd agree that Dell is really looking to innovate. Firstly, cloud is the in-thing these days and Dell (unlike other technology giants) is yet to make a presence in this area. Secondly, Dell's only development in the smartphone/tablet arena was with it's Dell Streak. This didn't make a strong impact either and I don't think Dell is coming up with any other smartphone or tablet versions.

  22. Mr. Roques
    December 23, 2011

    Dell had to approaches, first was to go for corporate world and I think they had a great success there, I think Lenovo/IBM still lead the way but they have to be in the mix. 

    Regarding normal customers, they were the first (?) that allowed full customization and being able to do that effectively.

  23. itguyphil
    December 23, 2011

    Yes. I think as you step into the large enterprises, IBM has a stranglehold. But with SMBs up to medium size, Dell is a leader. Dell also has a major stake in governmental organizations as well. That's a pretty nice portfolio to hang onto.

  24. mario8a
    December 30, 2011

    Is Dell moving from the hardware to firmware developer?

  25. Kunmi
    December 31, 2011

    I will say “all of the above”. It appeared Dell may be the next in line as the top rated electronic company in PC

  26. Mr. Roques
    January 19, 2012

    I think unless you rule a consumer electronics segment (Apple iPods, etc), a company should want to be in the less competitive big enterprise, high revenue business.

  27. itguyphil
    January 19, 2012

    That would be ideal but is easier said than done. If you are an organization that has some market reach and provides value, why not try to encroach on the big boys. It might just stir up a potential acquisition if all goes well.

  28. Mr. Roques
    January 26, 2012

    It is definitely easier said than done, and while the high-volume has many competitors, I would think the competition in the high-revenue is a lot stiffer, in that it involves more educated decisions.

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