Dell Sustains Itself on Notebooks

The PC vendor has a long road ahead, but there are signs Michael Dell's direction is beginning to pay off.

For years, Dell built its business by producing custom-made desktops for consumers and selling large quantities of these PCs into the commercial space, especially to enterprises in the United States.

Then, consumers and IT buyers shifted to notebooks and Dell found itself behind as competitors such as Hewlett-Packard, Toshiba, Acer and others filled the void with even more affordable laptops. HP continues to lead worldwide PC sales thanks in part to its strong lineup of notebooks.

Since his return to the CEO chair, Michael Dell has looked to change all that. The company is moving away from its custom-order desktop model and moving deeper into laptops and focusing its efforts on overseas in markets such as China, India and Russia as well as SMBs (small and midsized businesses). When the Round Rock, Texas, company released its latest quarter results May 29, which showed that the switch to this new model had begun paying dividends.

For the quarter, Dell notebook shipments increased 43 percent and revenue from laptops hit $4.9 billion, an increase of 22 percent from a year ago. On the other side, desktop revenue dropped 5 percent to $4.7 billion. Dell also announced that half its sales came from outside the United States. Those numbers helped Dell increase its net income 4 percent to $784 million in the quarter that ended May 2.

"The company has really done a lot of hard work in this area and I think you're starting to see it pay off and I think you'll see Dell have sustained, if modest, gains during the next several quarters," said Roger Kay, an analyst with Endpoint Technologies Associates.

As Dell moves forward, the company now needs to ensure that it has the right mix of notebooks that appeal to commercial buyers and consumers. In the next few months, the company plans to move into the low-cost laptops market - examples of this "mini-Inspiron" are now posted on one of the company's blogs - and Clay Sumner, an analyst with FBR Capital Markets, wrote in a May 30 research note that Dell is expected to have several dozen new laptop models enter the market within the next year.

"When it comes to new products, Dell used to wait and then come into a new market as a fast follower and try to beat their rivals that way," said Kay. "Now, their philosophy has changed and they want to been seen more as an innovator."

While the notebook has been good for Dell, it's not an all-encompassing cure for the company. While shipments were up, several analysts noted that the ASPs (average selling prices) for laptops continued to drop. While a drop in ASPs is good news for commercial buys and consumers, it means Dell will have to find new ways to cut costs in order to stay competitive with HP - a company that has worked to reduce its costs since it merged with Compaq several years ago.

In a May 30 research report, John Spooner, an analyst with Technology Business Research, wrote that it's easy for Dell to increase its shipments, especially by shifting to overseas sales, but the company will have to contain its costs.

"It's far more difficult to do so and also increase profitability, which is Dell's ultimate goal," Spooner wrote.

"To that end, the company has been attacking costs, lowering its operating expenses and targeting reductions in PC design, manufacturing and bill of materials costs," Spooner added. "TBR believes Dell will be forced to continue cutting costs to offset lower average selling prices in both PCs and servers as the company expands its sales in emerging markets."

A lot of this growth, however, depends on the overall strength of the economy, and Michael Dell and his management team noted that IT spending will remain slow throughout the summer. Kay believes that any economic difficulties that affect Dell could also affect other vendors, such as HP, and CEO Mark Hurd has noted that the U.S. economy remains "spotty."