Dell CFO: Services, Peripherals Beat PCs

Speaking to investors, Dell's Jim Schneider blames component costs and slipping PC prices for spurring the vendor's expansion into printers and TVs.

NEW YORK—Less than a week after Dell Computer Corp. posted third-quarter sales results that disappointed much of Wall Street, the vendors chief financial officer, Jim Schneider, took to the stage at Raymond James IT Supply Chain Conference here on Tuesday, telling investors that sliding profitability in the PC market has helped push Dell into services, printers and other peripherals, and most lately, TV sets.

Dell still remains "very cost-advantaged" over other PC vendors, owing to its supply chain, operational and direct distribution models, according to Schneider.

"The model isnt broken," the Dell executive said. Still, Dells cost advantage has narrowed recently, from 15 percent before to 10 percent today, he said.

/zimages/1/28571.gifClick here to read about Dells progress in the consumer market.

Last Thursday, Dell reported third-quarter sales of $13.91 billion, up 11 percent over the same quarter last year, but somewhat shy of Wall Street projections of a 12 percent increase.

Also during the quarter, the vendor spent $307 million on fixing faulty capacitor parts in some of its Optiflex systems.

Schneider credited internal cost reductions by some rivals with helping them to fend off Dells cost advantages.

But, he said, hardware component costs are falling more slowly than PC industry pricing, thereby narrowing the profitability margins for lots of vendors.

Dell still comes out on top in industry polls about customer satisfaction, for instance, Schneider said, but some customers are disappointed these days when they find out Dells warrantees arent as long-lived as they used to be.

Dell tries to achieve 9 percent profits on its PC products, but keeps falling short at around 8.5 percent, Schneider said. Also for the third quarter, Dell posted an earnings gain of 39 percent, for an 18 percent rise over last year, a figure that did meet analysts expectations.

Notebooks account for much of the industrys current growth, Schneider told the investors, but shrinking profitability margins on PCs have helped push Dell into other markets, some of which—such as services and certain peripherals—have turned out to be much more lucrative.

/zimages/1/28571.gifDell makes inroads in the services arena. Read more here.

Dell is a newcomer in other arenas, including printers and consumer electronics. Sales of Dell printers are lower than the company predicted a year ago, but sales of consumables—amounting to $7 million—are stronger, he said.

Dell is now weighing whether it makes more sense to build up a large installed base or to work on penetration of printer markets where consumables use is particularly high.

"Over time, I can see [printers] being very profitable, but not this year," Schneider said.

He also voiced optimism over Dells long-term chances in consumer electronics. Right now, though, Dell is investing too much in entering the TV market to be winning profits in this space, he said. Yet much of Dells future growth will need to emerge from the international sphere. Right now, Dell does about 10 percent of its business in the EMEA region, but only around 5 percent in the Asia-Pacific, Schneider said.

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