July 21, 2006 2:30 PM PDT

Dell's dog days of summer

Perhaps the only thing hotter than Austin, Texas, in mid-July is the pressure now on Dell executives after another poor quarter.

Dell on Friday again disappointed its investors, warning that both revenue and profit would be below expectations for its second fiscal quarter. Analysts polled by Thomson First Call had been expecting $14.2 billion in revenue and earnings of 32 cents per share. But Dell now expects to record $14 billion in revenue and only 21 cents to 23 cents per share in earnings, a solid dime off expectations.

What's gone wrong with the PC industry's low-cost wonder? To start, analysts wonder if Dell's costs are on the rise. Also, after years of wowing investors and the PC-buying public with its online sales and marketing, the resurgence of the retail market in PCs is hurting the company just as its corporate customers ease back on purchases, according to analysts.

Dell executives worship at the altar of the direct-sales model. For almost 20 years, Dell has used mail-order, telephone and the Internet to avoid the channel and inventory problems that can be a painful part of life for retail businesses. Even though it wasn't always true, Dell also managed to create an impression that it was a price leader, when its real advantage was that its costs were lower than retail-heavy companies like Hewlett-Packard and Gateway.

And that's still the message from the company with the leading market share in the PC industry. "The direct model remains our not-so-secret weapon," Chief Executive Officer Kevin Rollins told shareholders Friday.

Over the last few years, consumers have become the driving force behind the PC market, and more often than not they want to buy systems from retailers, said Samir Bhavnani, an analyst with Current Analysis.

The U.S. retail PC market is growing at a 25 percent clip, Bhavnani said, much faster than the 9 percent growth rate of the overall market. Dell is missing out on this category and companies like HP, Gateway and Acer are benefiting, he said.

But this is also coming at a time when the main part of Dell's business, the commercial PC market, has decided to take a break from buying new systems. Dell says 85 percent of its business comes from commercial entities, and those organizations buy PCs in upgrade cycles, said Charles Smulders, an analyst with Gartner. The last cycle started around 2002, three or so years after companies started buying PCs ahead of the perceived Y2K problems. It's now coming to an end, and business customers aren't expected to upgrade again until they've done extensive testing of Microsoft's Windows Vista, which is scheduled to arrive in the first part of 2007. That would put the next upgrade cycle around 2008.

"Wall Street always overreacts. They run up one side and then they run up the other side like a bunch of lemmings."
--Roger Kay, analyst

Dell also suffers from a dependency on desktops and U.S. sales, Smulders said. Desktop PCs account for 36 percent of Dell's overall revenue, the company said in its report for the first fiscal quarter. Sales in North and South America make up 65 percent of Dell's total revenue, with the U.S. comprising the largest part of that segment. In the U.S., commercial desktop shipments are expected to decline by 4.5 percent this year, said Richard Shim, an analyst with IDC.

Several more immediate concerns are also plaguing Dell and the rest of the PC industry. Intel's aggressive launch schedule for its Core 2 Duo chips has sent ripple effects throughout the industry as the world's largest chipmaker dumps old processors on the market to make way for the new chips. The resulting price pressure has caused problems for Intel's partners and competitors, as well as Intel itself.

Normally, when a company cuts prices, demand and unit shipments rise. But Dell doesn't appear to have seen significant shipment increases during the quarter, and has been doubly hurt by the fact that its competitors, notably HP, have greatly improved their cost structures, said Richard Farmer, an analyst with Merrill Lynch, in a research report distributed Friday.

"The market was caught by surprise that Intel was bringing forward their product launches; they thought they had a longer lead time to get rid of their inventory," Smulders said. "Intel's actions have sort of shaken up the industry and put additional pressure on the pricing environment in the second quarter."

Dell has tried to work its way up the PC price list, with heavy emphasis on its XPS lineup of PCs and its purchase of boutique PC maker Alienware. But those efforts do not appear to have overcome relentless pressure--caused by Intel's actions and the renewed strength of competitors--at the low end of the market. Plus, Dell has an image problem.

CONTINUED: Overcoming a bad image…
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15 comments

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Dell and Laptops
For the past 8 year or so, I have purchased a home laptop to
complement my work machine. These laptops were Dell. None
experienced hardware failures. Software failures, were a
different story. After becoming sick and tired of having to reload
software, redo drivers after a new program was installed...and
dialing India for help, I finally got an Apple Ibook. 'Nuff said.
This one is going on 3 years old. No reboots. Ever. No
crashes...ever. Viruses - yup, I know they're out there, but no
problems yet. When I get something at work that doesn't work, I
usually ship it home. Again, has always worked on my Apple.
My house has gone from a 5 machine - all Dell/Microsoft to 3
Apples/OS-X, one Dell/Microsoft, one Dell/Red Hat, and
counting. As soon as Crossover gets perfected so that I do not
have to own any MS OS, I'll transition to an almost Microsoft free
(and so far, malfunction free) environment.
Posted by Da Coyote (5 comments )
Reply Link Flag
Dell Disappoints...
>Dell on Friday again disappointed its investors<

As for customers, they have been disappointed by poor customer service, poor technical support, and poor product quality.

I switched from Dell to HP, and my next computer is definitely going to be another HP.
Posted by john55440 (1020 comments )
Reply Link Flag
Intel inside (only)
If Dell offered AMD versions of it's desktops and laptops, my last three personal PC purchases would have been Dell. Instead, I've gone with HP via Costco and eBay. At work, it's mainly Dell only. But no need to settle for Intel only at home.
Posted by cheap_jeff (3 comments )
Reply Link Flag
No need for new machines
At home and at the office I don't have a further need to upgrade, our PCs are over 3 years old and running just fine. I don't need the latest from Dell or Microsoft. Frankly when I make my next purchase it probably won't be Dell again. I am sick of calling India for tech support, I'm sick of playing games to get the best prices. After buying my Axim I got annoyed with the various gimmicks to get a discount. Gateway may be out of the competition picture now, but Dell has gotten lazy IMHO and allowed innovation to slip and prices to creep up to the point that they are no longer a great deal. But the services is the bottom line for me, I will not do business when I get tech support from a person I can not understand on the phone - that is the deal breaker for me.
Posted by (2 comments )
Reply Link Flag
No need for new machines
At home and at the office I don't have a further need to upgrade, our PCs are over 3 years old and running just fine. I don't need the latest from Dell or Microsoft. Frankly when I make my next purchase it probably won't be Dell again. I am sick of calling India for tech support, I'm sick of playing games to get the best prices. After buying my Axim I got annoyed with the various gimmicks to get a discount. Gateway may be out of the competition picture now, but Dell has gotten lazy IMHO and allowed innovation to slip and prices to creep up to the point that they are no longer a great deal. But the services is the bottom line for me, I will not do business when I get tech support from a person I can not understand on the phone - that is the deal breaker for me.
Posted by (2 comments )
Reply Link Flag
Just got a MacBook Pro
and I"m never going back to Winbloze and Dell!
Posted by microsoft slayer (174 comments )
Reply Link Flag
Analysts are lemmings
The article is absolutely right about one thing, analysts and Wall Street are lemmings. They set their 'expectations' (which often seems like a number pulled out of thin air) and then when a company doesn't meet those 'expectations' they punish them. Maybe we should do away with 'expectations' and focus instead on how the company is doing in general. I'd say $14 billion is nothing to sneeze at, and IIRC Dell has money in the bank. Hmmm... maybe Dell doesn't need as much fixing as the 'experts' (who, BTW, aren't in the industry) think.
Posted by craig_wagner (4 comments )
Reply Link Flag
Analysts are lemmings
I'm anti-Dell, but to put things into perspective:

According to IDC, Dell's Q2 2006 USA market share is 34.2% compared to 4.8% for Apple.

Things could be worse...

Go HP! :-)
Posted by john55440 (1020 comments )
Link Flag
The Lemmings Expect Corporations to be Sheep
... and to have a strategic vision no further than this coming Friday's "earning guidance" conference call with the analysts.

"That must be the tenth alienist they've had on Williams. Even if he wasn't crazy before, he would be after ten of those babies got through psychoanalyzing him."

-- Porter Hall, as Murphey in "His Girl Friday"
Posted by Too Old For IT (351 comments )
Link Flag
Dell support
Dell shouldn't be shocked. I have had so many problems with Dell since i purchased almost 2 years ago, and I am not the only one. Dell still has a name but its constantly being tarnished by poor customer service, poor technical support, and a poor sales staff. I dont like being treated like i'm stupid and i dont like being lied to which dell does constantly. I've even been hung up on by sales staff because my address didn't match their records which were several months out of date (yes i updated them). Dell just needs to start listening to their customers again.
Posted by BeamerMT (64 comments )
Reply Link Flag
No way to differentiate.
What's the difference between a Dell XPS system and somebody
else's $300 Windows PC, other than the ability to run more
viruses a bit faster? None, really. Sure the $300 machine may
have a slower processor, less RAM and a smaller hard drive, but
so what? They both run the same OS with the same litany of
problems. One just runs the viruses faster!

Windows PC Makers aren't so much computer companies as PC
assemblers. They don't really design these things so much as
slap a bunch of parts (made by other companies) together. They
don't even own the OS!!! In a situation like that, it's just a race to
see who can make the cheapest box. That's a race nobody wins,
not even the buyers, because the cheapest box has to include
support from the cheapest labor pool. Don't be surprised when
you can't understand the tech support person for your Dell or
any Windows based PC  it's what you bought into when you
bought the box.
Posted by Macsaresafer (802 comments )
Reply Link Flag
In the "old" days in was all about service
I worked for a major computer manufacturer and before that I was a customer of that manufacturer. We did not chose that particular brand because of price; it was not the cheapest. What sold us was service. The company itself recognized that service, not price was key. The company was recognized by the industry as having the best customer service and support of any of the major computer manufactuers.

Those days are gone, as one reader pointed out, this has become a race to the bottom, and service and support naturally have become the victims of this. Basically when you, as a consumer customer buy a windows PC, you are buying this with the implied understanding that you are on your own.
Posted by fearless345 (10 comments )
Link Flag
An example of Dell service, why they suck.
My HDD died. Using Maxtor's tools I test and see there are bad sectors all over the disk. I call Dell, they won't replace the drive. The support idiot says I have to reformat the drive and wait for it to die again before they will replace it. F_ that, it wasn't worth my time dealing with those idiots for the $50 it cost to replace the drive on my own.
Posted by extinctone (214 comments )
Reply Link Flag
Why, oh why ??
Let's analyze this:
Take the support and ship it offshore, make PC's look really affordable only to dissappoint the buyer when the price skyrockets after all the "customizations," show apathy to customer complaints...... it's a recipe for disaster. It does not matter how big your company is.. customer service eventually catches up with you...shall I name a few?.... Dell, of course, MCI, MBNA, Home Depot .... WAKE UP management - when the foundation is weak (yes - your customer service is your foundation)- YOU WILL TOPPLE OVER!
Posted by gfsgeek (1 comment )
Reply Link Flag
Waiting for Vista? A hypothetical:
I think that commercial buyers (esp. business IT departments) are likely holding out for Vista to see if it's even worth doing in a business environment, or if they can just continue to use their current hardware and put the saved $$$ into training workers to use Linux or BSD on their desktops, and just keep using XP until it dies for those instances where, say, a custom-built or niche-built Win32 app is still necessary.

It'd be a safe bet to make, considering that a lot of businesses are feeling rather burned over Microsoft's Software Assurance...

/P
Posted by Penguinisto (5042 comments )
Reply Link Flag
 

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