There are more tough decisions ahead for Michael Dell and his company.
After reporting disappointing fiscal fourth-quarter results Feb. 28, the PC vendor is likely to face a number of challenges as he tries to bring the company back to the profitability that so many on Wall Street have come to expect.
During its fiscal fourth quarter, which ended Feb. 1, Dell’s net income was $679 million, or 33 cents per share, which is a 6.5 percent drop from the $726 million in net income the company posted a year ago. For the quarter, Dell’s revenue increased from $14.5 billion last year to $16 billion this year.
Dell is also trying to make a comeback at a time when the U.S. economy is showing continued signs of a slowdown. The U.S. market remains extremely important to Dell even though it reported Feb. 28 that 49 percent of its revenue in the fourth quarter came from overseas, where sales increased 16 percent.
Since Michael Dell returned as CEO more than a year ago, he has tried to refocus the company, offering enterprise services and more sophisticated technology, such as iSCSI storage products, while expanding its PC business to include more consumer sales through retail agreements.
At the same time the company wants to grow, Dell has also cut costs and trimmed staff in hopes of becoming leaner as it competes against Hewlett-Packard and other rivals in the PC and server markets. Donald Carty, Dell’s chief financial officer, said he wants to eliminate about 8,800 positions at the company.
“They [Dell] are clearly trying to think about their cost-structure needs,” said Stephen Baker, an analyst with the NPD Group. “Dell is also trying to [generate] more volume through their channels and that might squeeze their margins a little bit. They are trying to be cost effective there now so it doesn’t cost them in the long run.”
In some ways, Dell’s current struggles to reinvent itself in the market reflect the difficulties HP went through after acquiring Compaq. To improve, HP needed to streamline its operations, trim staff positions and look for ways to offer new services and technology to its customers.
Only now is HP reaping those benefits.
A Matter of Diversification
Dell remains the top PC vendor in the United States. and a Forrester Research report found the company is still the No. 1 provider of desktops and laptops to the enterprise, but its total sales in the Americas, including its strong presence in the United States, last quarter were up only 8 percent, which lagged behind the rest of the world. Baker said a further downturn in the U.S. economy could compound Dell’s problems.
“Financial services are one part of the industry that spends a lot on tech and any impact on that industry could have a broad impact,” Baker said. “For years, Dell has been too dependent on American sales and they have not gotten the diversification that they need in order to deliver sales and earnings consistently.”
By contrast, the so-called BRIC countries – Brazil, Russia, India, China – offered a much better picture than the U.S. market for Dell, with revenues increasing 36 percent and units shipments up 50 percent. In Japan and other Asia-Pacific countries, revenues increased 28 percent and shipments increased 41 percent.
Unlike Dell, HP has diversified, and about 70 percent of its revenue now comes from outside the United States. HP President and CEO Mark Hurd announced Feb. 19 that the company’s net income for its own fiscal fourth quarter stood at $2.13 billion, and he gave a positive outlook for the company in the next three months despite macroeconomic concerns.
While Dell did not offer financial guidance for the upcoming quarter, Michael Dell told analysts in a conference call even if the U.S. economy continues to slow, enterprises will turn to technology ito save money and streamline their own operations.
In a research note, Shaw Wu with American Technology Research pointed that Dell’s efforts to grow its business and streamline its operations could come at the expense of profits for the next several quarters.
“Cost savings from its lay-offs could be offset by higher R&D spending and efforts to improve its customer service and retail-distribution initiatives,” Wu wrote. “HPQ [HP] and AAPL [Apple] remain very formidable competitors, having caught up on their supply-chain costs and with their greater presence in consumer and international markets. In addition, Acer and Lenovo remain tough competitors.”