Dismissing critics who say Dell Computer is too heavily dependent on PC sales, executives with the computer maker reaffirmed their commitment to personal computers late Thursday, contending that the business remains "extremely healthy and very profitable."
In announcing the company's second-quarter earnings yesterday, which were up 19 percent to US$603 million from a year ago, Dell officials downplayed concerns about a heavy reliance on PC and notebook sales, which account for about three-fourths of its revenues.
"While many others are trying to run out of the desktop business and chasing off to other opportunities, we see those new opportunities as additive and not substitutive," said Kevin Rollins, Dell's vice chairman, during a conference with analysts late Thursday.
Although Rollins didn't specify which companies he was addressing, some of Dell's top competitors, such as Compaq Computer and Gateway, have loudly promoted recent initiatives to decrease their dependence on PC sales. In fact, Gateway recently touted that its "beyond the box" sales accounted for 40 percent of the computer maker's overall quarterly revenues.
For the second quarter, Dell beat Wall Street consensus estimates by a penny a share, earning 22 cents a share on sales of US$7.7 billion. By comparison, total sales were up 25 percent from the year-ago quarter when the company earned US$507 million, or 19 cents a share, on sales of US$6.14 billion.
But Dell executives did acknowledge that net income came in about US$200 million under projections, citing slower-than-expected sales in Europe and the government sector. However, they stressed that the company remains on track to meet its forecasted 30 percent increase in annual revenue this year.
Vulnerabilities
Despite Dell's continued strong performance, several market analysts have expressed concerns that the computer maker has not sufficiently broadened its revenue base by increasing sales of servers and services, leaving it vulnerable to slower PC growth and decreasing profit margins.
In response to questions from analysts Thursday, Jim Schneider, Dell's chief financial officer, admitted that the average selling price of desktops, a key factor in sustaining profit margins, has "continued to trend down" over the last couple of years.
Following Dell's announcement, at least one analyst warned that the company is headed for trouble if it doesn't broaden its revenue base.
"Unfortunately, Dell has not seen the shifting sand in the PC industry," said Ashok Kumar of US Bancorp Piper Jaffray. Earlier this month, Kumar lowered his stock rating for Dell from "strong buy" to "buy," citing concerns that the company has yet to significantly expand its server, storage and services businesses.
"Even though this was a growth year, they should have seen that the PC market growth rate is slowing down," he said. "Now the growth rate is slowing down and they don't have any enterprise strategy to speak of. They should have set in place their enterprise strategy a while ago, because that takes some time to gel."
Dell's dependence on PCs makes it more vulnerable to any industry downturn, other analysts said.
"I think that Dell has to start looking at generating more of their revenue from non-PC related items," said Kevin Knox, research analyst with the Gartner Group, in an interview earlier in the week.
In addition, he said, technological advances that have driven PC hardware sales have exceeded those of software applications, so much so that companies will be less inclined to update their systems.
"Because of the disconnect between hardware and software, OEMs like Dell will be forced to financially justify getting companies to stay on a three-year refresh cycle," Knox said.
Key to future growth
Addressing concerns about refresh rates, Dell's Rollins noted the company's surging sales of notebook computers, which grew at twice the rate of the desktop business and now account for 30 percent of systems revenue.
"This creates a favourable environment because mobile computing typically has higher ASPs [average selling prices] and a more frequent replacement rate than desktops," he said.
But the key to Dell's success, Rollins said, lies in expanding its reach and market share around the world.
"We have 11 percent share of the worldwide market, but only 5 percent outside of the US and the UK, where we already lead those markets with 20 percent and 18 percent share, respectively," he said. "We are extending the reach of the direct model to new countries and regions that have great growth potential, like Latin America, China and India."
