Dell on the Defensive

Everyone seems to be attacking Dell lately. Business Week, in particular, has taken a strong anti-Dell stance. They have a story now on how HP is outmaneuvering Dell.

Few investors would dispute the notion that Dell is one of the great companies in tech. The world’s largest computer maker’s earnings jumped more than 25% last year, outpacing a nearly 19% rise in sales. It has a clear playbook to push into higher-margin products and new geographic markets. So why are Dell shares down 16% since the end of last year, while those of rival Hewlett-Packard have soared more than 27%?
HP is simply beating Dell hands down in managing Wall Street’s expectations. HP was long one of tech’s most mediocre performers — famous for big earnings disappointments and unfulfilled ambitions. But the stock lost its “Carly discount” after the divisive Carleton S. Fiorina was shown the door in April, and the new chief executive, Mark Hurd, began doing the right things.

Please. HP has huge problems of its own. The company is laying off 15,000 employees, and it’ll be lucky if sales rise 5% this year. True, the stock is up this year in the sense that it’s less sharply off its high. Wall Street is applauding HP’s cost-cutting initiative. But Dell never implements one because it never has bloated costs.

By contrast, Dell is becoming a victim of its own success. On Aug. 11 the company announced a second-quarter sales increase of 14.7%, far outpacing HP’s 10% rise. The Round Rock (Tex.)-based Dell said it cut prices too much and didn’t sell as much as it hoped to the federal government.
Trouble is, the sales number was below its own earlier forecast of a 16% to 18% increase. Worse yet, Dell also ratcheted down its revenue projections for the current quarter ending in October. Dell’s stock immediately tanked 7.4%.

This story is searching for a theme that doesn’t exist. Dell could have made up the sales shortfall with a minor price increase on each of its units sold.

On Aug. 12, high profile Goldman Sachs analyst Laura Conigliaro downgraded Dell to “market perform” from “outperform” because of the lower estimate for future sales growth.

That’s for people who haven’t gotten the hint. On the day of its earnings report, Business Week ran another anti-Dell story quoting, again, Laura Conigliaro.

Clearly, Dell is still a fabulously successful company. It’s earnings grew 28%, and sales–while slightly low of expectations–still grew a brisk 15%. But the specter of slower revenue growth in the future has analysts worried that even Dell is running out of easy pickings–that even it will have to break a sweat to find customers willing to pay enough for plain old PCs to keep its financial formula in good working order.
As with almost everything these days, there may be a “rise of Asia” component to this story. Laura Conigliaro, Goldman Sachs’ excellent hardware analyst, points out in a report titled “A Miss With Much Wider Implications,” that rivals such as Acer, Lenovo and BenQ are pushing prices down farther than even Dell may care to match. What’s more, much of Dell’s growth is coming from Asian customers, who typically buy cheaper configurations.

A more serious problem that Dell is facing is a massive attack from blogs. Jeff Jarvis wrote about his experience with a new Dell and the company’s lousy customer service. Again, Business Week reports the gory details:

The Jarvis affair seems to have struck a chord with other Dell customers. Daily visits to BuzzMachine have doubled, to more than 10,000, estimates research firm Intelliseek. Among the responses: “Dude, get an Apple.”

This comes on the heels of a University of Michigan report showing that Apple creamed Dell in a customer survey.

Customer satisfaction at Dell, the world’s largest personal- computer maker, declined 6.3 percent, based on the University of Michigan’s American Customer Satisfaction Index. Dell fell further behind Apple Computer Inc., which grabbed the top spot in 2004.

I’d be much more concerned with a reputation for poor customer service. Initial reports show that Dell is taking this very seriously. I’m not so worried about Dell’s revenue shortfall. AMR Research rises to Dell’s defense:

Wall Street is punishing Dell for missing its revenue target last quarter, but a closer look reveals a price management strategy in play, writes Laura Preslan and Mark Hillman of AMR Research.
Dell has long been the poster child for using price to shape demand and keep the supply chain running smoothly.
The ability to match available configurations to consumer discounts has set the company apart from its competitors. Look back to when Dell made headlines during the 2002 dock strike, offering flat screen monitors for a nominal price increase because they could be shipped via plane more easily than traditional monitors.
Dell knows how to use price to shape demand.
Nonetheless, doomsayers have claimed that Dell’s revenue miss signals its demise. Faced with a shrinking market, Dell, the only PC maker that has generated consistent revenue and profit growth for several years, is no longer able to keep up.
Except for one thing: profits are up. In fact, profits are up by 28 percent to $1.02 billion in quarterly net income, and Dell took market share in every region. Clearly revenue growth is important, but in a rapidly commoditising business, profit is king. The less popular, but more accurate interpretation of Dell’s miss is that it bought customers with lower prices, but was able to increase profits, only cementing its leadership in price management.
The effective application of price management discipline can create several outcomes, from higher revenue, to more customers, to increased profits. Dell grew quarterly revenue by 15% and net income by 28 percent. Add the marketing perspective of cementing loyalty with price and that buyers today become less price-sensitive over time, and Dell reveals itself to still be on top of its price management game.

Posted by on August 25th, 2005 at 12:50 pm


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