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Money talks. Loyalty walks. And in a potential price war you need to open the door to a larger Advanced Micro Devices partnership.
That sums up why Dell finally (and we mean finally) decided to use AMD for multiprocessor enterprise systems.
Rest assured that this AMD deal will expand to the desktop. Why? Dell plans to cut prices to boost revenue growth. And if youre going to compete on price you need AMD in your corner.
The harsh reality: Its very hard to go from Wall Street darling to dog, and thats what Dell is facing. The solution: Cut prices, improve customer support, grudgingly use AMD chips and hope you can compete against a resurgent Hewlett-Packard by cutting structural costs.
In the meantime, Dell has to eat a little crow for being stubborn when it comes to AMD. You cant underestimate how much of a sea change this AMD deal is for Dell, given it took 578 words to get to this little nugget in its earnings release: “In the enterprise, we will launch new ninth generation servers featuring Intels Woodcrest microprocessors. Dell will also introduce new AMD Opteron processors in our multi-processor servers by the end of the year offering a great new technology to our customers at the high-end of our server line.”
Why is it so hard for Dell to announce an AMD partnership? Perhaps its because Dell executives have been professing their undying loyalty to Intel for years.
In an interview published in January, eWEEK asked Dell CEO Kevin Rollins if there were a certain level of customer demand that had to be reached before Dell began offering AMD products. His response: “I dont think its so much a level. I think the issue is, When will Intel catch up and have products that are at parity or better? If you have parity or better, why would you switch to AMD from Intel?”
That argument reappeared during Dells analyst conference call. Rollins noted that AMD has an advantage at the high end of the market, so Dell is using Opteron. He was a bit evasive about any desktop plans. Dont buy it. Dell will eventually need AMD on the desktop too.
For the most part, Rollins largely fielded questions about a potential price war and how the company will grow in upcoming quarters. Guidance for the future will be hard to come by, given that Dell will stop providing projections for future quarters, Rollins said. The company is planning for the long run, Dell said. (A skeptic would note that no guidance from Dell means you dont have to issue profit warnings anymore.)
So whats the bottom line? In the short term, the AMD announcement couldnt be better timed. From an investor relations perspective, announcing an AMD partnership is a great way to distract Wall Street from disappointing fiscal first-quarter earnings of $762 million, or 33 cents a share, on revenue of $14.2 billion.
So far, so good: Dell shares popped after hours.
In the long term, Wall Street analysts seemed quite preoccupied with the potential price war, as they should be, given the impact on profit margins. Dell executives danced around the topic, but a tough pricing environment seems like a given. And if thats the case, it is clear that the PC maker will need more AMD chips.