May 3, 2001 5:35 PM PDT

Cost-cutting to be "ruthless," Dell exec says

NEW YORK--A top Dell Computer executive said Thursday that the company will be "ruthless" about cutting costs, but declined to comment on speculation about more layoffs.

Speaking at a Merrill Lynch technology conference, Tom Meredith, senior vice president of business development and strategy, said Dell plans to cut costs further because that's the company's best advantage against its rivals.

"We will be ruthless about how we adjust our cost structure going forward," Meredith said.

Asked whether that statement meant more layoffs are on deck, Meredith said the company "won't comment on rumors." Although Meredith didn't rule out additional layoffs, he added that Dell will look at "areas that haven't been attacked."

Dell shares were down $1.80, or 7 percent, to $24.93 at market close.

The PC giant will look to cut costs through transportation and logistics, warranty terms and productivity enhancements, he said.

Dell's plan for success has been to tackle commodity tech markets such as PCs and then beat the competition by being more efficient. Meredith acknowledged that the company eased off its cost-cutting last year and stumbled. "We had to cut costs to regain our advantage," he said. "We are going for growth now."

The price war
Cost reductions will be essential for Dell to preserve profits as it works to gain market share. The Round Rock, Texas-based company has been boosting market share and cutting PC prices for the last six to nine months, Meredith said.

The efforts seem to be bearing fruit. Dell has become the top dog in the worldwide computing market, encompassing both PCs and servers, according to market researcher Dataquest.

Compaq Chief Executive Michael Capellas said his company is up to the challenge.

"We will be much more aggressive on pricing," he said. "The price war will continue."

When asked whether Compaq could compete with Dell on prices, Capellas said it could because it's better at managing inventory. He added that component prices have declined in recent months and that 45 percent of the company's sales were made directly to customers.

News of the price war was enough to prompt UBS Warburg to downgrade Dell from "strong buy" to a "buy."

"We remain concerned about Dell's continued price aggression, and we lack confidence that the PC industry's sacrifice of short-term profitability will lead to long-term gains," said UBS analyst Don Young.

"On the pricing front, we eventually expect Gateway to become more aggressive, and we understand Compaq is now matching Dell's pricing," Young said.

Meredith said he wouldn't comment on Dell's first-quarter results because the company's quarter closes Friday at midnight. Dell, which reports earnings May 17, is expected to report a profit of 17 cents a share on sales of $8.04 billion.

Of handhelds and chips
Dell may enter the handheld market once that field evolves, but don't expect anything soon, Meredith said. The company sees that market becoming a commodity; and when it converges on one dominant operating system and information technology departments buy systems in bulk, Dell will become interested.

IT departments' volume purchases of Research In Motion's BlackBerry pager are a step in the right direction, but it's too early to predict winners, he said.

"Right now the PDA (personal digital assistant) market is driven by the individual--there's not a lot of profit there, and no real winner has emerged," Meredith said. "Until a standard emerges, there's no need to enter the market. Why pick now when you could be wrong?"

A deal with Advanced Micro Devices is also not in the near future, Meredith said, echoing a statement by AMD CEO Jerry Sanders on Wednesday. Meredith said that using AMD chips may create too much complexity with outsourcing partners and other behind-the-scenes functions such as procurement.

Until there's a "significant disparity between price and performance" with AMD and Intel chips, Meredith said Dell will stick with Intel. "It doesn't mean AMD is a bad company, but it doesn't give us a significant leveraged advantage," he said.

 

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