April 3, 2003 10:24 AM PST

Dell sets sights on $60 billion

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Dell Computer says it's now well on the way to becoming a $60 billion company.

The Round Rock, Texas, PC maker, known for its aggressive pricing on computer hardware, has quickly gained market share and boosted revenue and profitability over the past several years.

In the fiscal year that ended Jan. 31, Dell collected $35.4 billion in revenue and turned a $2.1 billion profit. It finished the fourth quarter of calendar 2002 with nearly 16 percent of the worldwide PC market, second to Hewlett-Packard by only about 140,000 units, according to IDC.

But Dell executives, who last April set the company's goal of doubling revenue from the $31.2 billion of the preceding fiscal year, believe that 2002's performance is only the beginning for the company.

"The ability to become a $60 billion company is within our grasp," Kevin Rollins, Dell's president, said at the company's annual meeting with financial analysts in New York on Thursday.

To reach that milestone, Dell is banking on continued market share gains. Executives say that for every percentage point of the market the company accrues, it also takes in an additional $2 billion or so in revenue. To hit the $60 billion target Dell would have to increase its share of the PC market--its mainstay--to nearly 30 percent. It could also add revenue by other means, such as services contracts or sales of peripherals.

The revenue goal is attainable, analysts said. But Dell will face challenges from competitors including IBM and HP, which ultimately seek the same basic goals.

"I think it is doable," IDC analyst Roger Kay said. "Things could go wrong, but Dell continues to execute against its model, and (the model) seems to work. It's hard to say what's wrong with that. I've been looking for a weakness, but so far I can't find any."

Dell will be using a three-pronged strategy to reach toward its revenue goal: squeeze more cost savings out of its own business, launch new products for businesses and expand its presence worldwide.

Dell expects to cut about $3 billion in costs this fiscal year, the executives said, most of which it will pass along to customers in the form of lower prices. The company also plans to foster customers' adoption of new products, such as blade servers and network storage systems, along with new services. Dell will continue looking for growth in new markets outside the United States.

The PC maker says that the sum of the three efforts should help it increase its unit shipments, gain more market share and increase "wallet share," or the amount of money existing customers spend to buy additional Dell products or services. Most customers spend only a small percentage of their overall information technology budget with Dell, and the company wants to increase that figure to 30 percent or more over the next few years, Dell executives said at the meeting.

To get there, Dell has begun offering a wider range of products. The company has expanded its product lineup from its mainstay of desktops, notebooks and servers to include rack-mounted and blade servers, network storage systems and professional services. On Wednesday, for example, Dell launched a new Linux cluster product with Oracle.

Dell's newest, "premium level" services include helping customers plan new server or storage system installations and migrate their data to them. Dell also offers services that help companies release new software such as e-mail systems on its hardware.

Dell sells many of these services via a fixed-price menu that allows customers to sign up for services they need and pay a flat rate.

Juggernaut on the move
In the top-tier market, which includes servers, storage and services as well as software and peripherals like printers and flat-panel displays sold to large companies, Dell believes the sky is the limit.

"We can make money and at the same point erode the ability of our competitors to compete and be profitable," Rollins said.

The worldwide services sales opportunity for Dell equals about $125 billion per year, while peripherals equal an opportunity worth $75 billion, Rollins said. Right now, Dell has about 4 percent and 6 percent of those two markets, respectively, he said.

Meanwhile, Dell has only a small piece of the overall worldwide market for computer hardware. It has about 10 percent of the European market, which represents about one-third of the global market, Rollins said. "The point being is that there's still plenty of room in all of these markets for us to grow."

Dell's growth in Europe, where HP is strong, has been somewhat slower than expected, according to IDC's Kay.

Kay added that Dell could also run into a performance roadblock with computing clusters, which create powerful computers by stringing together a large number of otherwise standard servers.

As clusters grow in size, the network that shuttles data between the computers, or nodes, gets more complex. Theoretically, performance gains could be limited after a certain number of nodes, Kay said. "A lot of the proprietary technology that HP and IBM have specifically addresses those (limits)."

Dell builds computers with standard components such as Intel processors and loads them with the Windows or Linux operating system. It negotiates aggressively with suppliers and encourages internal practices to reduce costs, passing much of the savings on to customers through pricing, with the aim of beating competitors with lower prices on standard equipment.

Dell says its costs are about 15 percent lower than those of its rivals. In turn, the price tags that customers see on Dell products are about 10 percent lower than competitors', the company said.

But it's not likely to escape challenges, not only from HP and IBM but also from global heavyweights NEC and Fujitsu-Siemens. HP, for one, has lowered its PC prices significantly with the aim of competing more aggressively with Dell.

Meanwhile, IBM has stepped up efforts to differentiate its PCs by offering management software that's not present on Dell gear. The company's huge IBM Global Services division has also signed a series of billion-dollar deals this year. These deals often lead to sales of desktops, servers and other computer hardware as well, increasing sales in IBM's PC business.

Dell plans to keep the pressure on, though it says it will stop short of sparking an all-out PC market price war to protect profits.

"We will continue to offer the best value in the industry by far," Dell CEO Michael Dell said. "With respect to gaining market share...there are other factors that need to be considered instead of just price."

 

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