Dell Points to Progress in Consumer Market

The PC maker's CEO, Kevin Rollins, admits miscues led to lower third-quarter revenue and profits, but he says the company has already begun moving to correct them.

Dell Inc. says its back in the groove.

The PC maker followed a second-quarter consumer PC pricing misstep with what amounted to a disappointing third fiscal quarter.

Dell reported on Thursday record revenue of $13.9 billion on shipments of 9.2 million units for the quarter, which ended Oct. 28, but saw slower than expected sales in some segments and took charges that cut its profit to 25 cents a share.

However, Dells top executive said the companys consumer business is in better shape entering its fourth fiscal quarter and the coming holiday season, and its overall business model is solid.

Dell relies on products such as servers and storage systems, which saw revenue jump by 16 and 35 percent, respectively, during the quarter, for the bulk of its quarterly take. But it spent the third quarter fixing its consumer business.

As part of this effort, the Round Rock, Texas, company consolidated its consumer and small business groups in the United States.

It also reworked its consumer PC sales strategy by introducing the XPS brand, a line of new high-end desktops and notebooks that offer premium services, in addition to reworking its pricing strategy on the remainder of its consumer PCs.

Thus Dell enters its fourth fiscal quarter, which encompasses the holiday consumer PC buying frenzy, with a wide range of deals, starting with $299 desktops and $399 notebooks and scaling to multi-thousand-dollar Dell XPS systems which, despite costing more, will offer relatively high value for their prices, said Kevin Rollins, Dells CEO.

"We believe that [the consumer PC] model might have fallen into a bit of disrepair" during the second quarter, Rollins said in a conference call to discuss the earnings with reporters. But, he said, "Weve been focusing this quarter on getting it back, and feel we have."

Still, Dell issued a relatively conservative fourth-quarter forecast of revenue growth of between 9 and 11 percent. The forecasted increase represents a smaller jump than in some years, but Dell said its still on track to reach $80 billion in sales.

"We believe that 9 to 11 percent revenue growth rate is a very healthy growth rate for a company of our size," Rollins told analysts in a later conference call to discuss the earnings.

Despite Dells efforts to get its consumer business back on track, some analysts worry the company could be facing a gathering storm.

After a long period of growth, which saw it boost its PC market share in leaps and bounds and expand its product lines to include printers—a business Rollins said has turned the corner on profitability and will remain so—and consumer electronics devices like televisions, Dell may have been setting Wall Streets expectations too high, one analyst said.

At the same time, the company is facing intense price competition from rivals Hewlett-Packard Co. and Gateway Inc., which also owns the eMachines brand and it continues to have problems with its customer support machinery, another analyst said. Even some of the tools Dell uses to boost revenue, including up-selling customers on components, may have lost some of their oomph, according to a third.

In toto, several of the things that helped make Dell successful in the past may no longer be as effective in the consumer space, the analysts said.

"The Dell model is still quite strong, but management clearly underestimated the negative impact of outside influences, particularly in regard to the developing economic weakness in the United States," Brooks Gray, an analyst with Technology Business Research Inc., said in an e-mail on Thursday night.

/zimages/1/28571.gifClick here to read more about shrinking consumer satisfaction with Dell.

"I believe Dell is a leading indicator for the U.S. IT market, signaling that other technology vendors are likely to experience significant growth contractions in the coming months. With that said, Dell should be able to incrementally gain share during a cyclical downturn," Gray said.

"The company remains well-positioned versus its competitors in the PC market, and is making inroads in services, enterprise products and peripheral devices. The negative sentiment in the market is primarily due to the re-alignment of Dells financial targets to deteriorating IT spending, but it should be clear that the Dell business model is not broken."

But other analysts suggested that parts of Dells third-quarter consumer troubles have to do with its own internal operations.

"Theres been a tremendous well of consumer unrest regarding Dells consumer ordering and services," she said. "I have no statistically valid data on this, but I have enough friends, business colleges, their relatives and so on out there who have had bad buying experiences. And there are a number of people who say never again. We could be seeing that lack of repeat buyer and the bad recommendations percolating out."

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