Dell reaffirms guidance
Computer maker's low-cost, low-inventory approach still seen as key to success
NEW YORK (CNNfn) - Dell Computer Corp. said late Wednesday it expects to match Wall Street's sales and earnings forecasts for its fiscal first quarter.|
The Round Rock, Texas-based hardware maker said after-the-bell it expects to report first quarter earnings of 17 cents a share on $8 billion in revenue, in-line with analysts forecasts, according to earnings tracker First Call.
Dell said it plans to officially confirm its guidance at its spring analyst meeting in New York Thursday. However, the company is not providing guidance going forward.
Dell along with other computer makers have been hit with an industry-wide slowdown in demand for desktop PC's and have slashed jobs and costs in hopes of maintaining the bottom line. Dell, which sells directly to customers, has managed to succeed with its low cost structure and tight inventories, but already slim margins have come under increasing pressure as demand continues to wane.
"Current softness in industry demand and profit margins is not a secret," CEO Michael Dell said. "But in this environment, the differences between Dell and other major companies are compelling."
Dell also said it anticipates solid international expansion year and that it expects to achieve growth twice or more the industry rate in all markets for the current fiscal year.
Dell (DELL: Research, Estimates) stock, which is trading at less than half its 52-week high of $56.87, ended down $1.25 Wednesday at $22.19. In after-hours trade following the announcement, shares rose $1.
It's no surprise that the 36-year-old Dell is chair and chief executive officer of one of the most successful computer companies today. At age 12, the native Texan made $2,000 through a mail-order stamp business.
In high school, he earned $18,000 selling subscriptions for a Houston newspaper. And unlike many starving college students, the young Dell was grossing $50,000-to-$80,000 a month fixing used computers and reselling them out of his dorm room.
After just one year of college at the University of Texas at Austin, Dell followed the same path as other technology leaders like Microsoft's Bill Gates and Oracle's Larry Ellison and dropped out to start his own business.
Started in 1984, Dell Computer Corp. ranks as the No. 1 one computer company in the United States and No. 2 in the world based on calendar 2000 unit shipments complied by International Data Corp.
The right formula
The company's success is rooted in its "deal direct" mantra, which aims to squeeze out as much time and manpower as possible between a customer order and product delivery.
Dell explained that as he spoke to the audience, Dell's parts suppliers were responding to $50 million worth of orders taken Tuesday, and assembling units that would be shipped by Wednesday.
By hard wiring suppliers into the ordering system and incorporating the Internet, Dell has successfully converted up to 90 percent of their customer transactions to electronic processing or "frictionless orders."
This made-to-order system allows Dell to avoid managing raw materials or inventory. And Michael Dell claims that the company suppliers' inventories are breathtakingly short, hovering around five days, versus Hewlett Packard's (HWP: Research, Estimates) 63, for example.
Price cutting and industry consolidation
By cutting costs through the direct sales model, Dell has been able to slash prices on PCs, laptops, and now servers. Competitors, like Hewlett Packard and Compaq, have responded with further price cuts on their products.
However, with slackened demand and over capacity in a soft economy, the price war is creating a pressure cooker in the personal computer industry.
Analyst Andy Neff at Bear Stearns foresees industry consolidation for PC makers as a given, perhaps as soon as the next three-to-six months. "If Dell maintains its aggressive posture," he wrote at the end of March, "it is poised to benefit from gaining share and improving its position relative to vendors."
When asked if they would ease up on pricing, Michael Dell, in an interview with BusinessWeek for the magazine's Captains of Industry series in New York City Tuesday, simply stated, "We're not giving up."
Yet many analysts are critical of the relentless push on pricing by Dell and others. Lehman Brothers' analyst, Dan Niles, commented last week that "the market's focus on the top line may be missing the pressure on margins which are increasing."
While Dell did gain 2 percent of market share in the United States last quarter, their profit margin declined to 18 percent sequentially below most Street expectations.
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One company that is getting squeezed, according to the Dell CEO, is Apple Computer. Having gobbled up portions of Apple's prior monopoly in the education market, Dell was critical of his competitor's future. "We know how the movie ends. It's just a question of what happens in the middle."
Asked whether or not Dell Computer would acquire another company near term, given depressed stock prices and its strong cash position, the CEO replied, "Just because it's cheap doesn't mean it's good."
Outlook for tech
Referring to the broader technology environment, Dell said, "It's clearly a bad time for all companies. I don't have a crystal ball on the economy but investment in technology will continue. Some business just don't have any business trading. There's a sorting out process that needs to take place."
New products beyond PCs, portable computers and servers don't seem to be a top priority either. "Our job is to put more and more value in per price point. That's our challenge: more value, a better performance for the same price," Dell said.
Looking ahead, Dell would like for his company to be known as having "a very different and competitive business model and took advantage of that strength."
"I think about Sears and Wal-Mart when I think about us and our competitors. It's a very hard business model to duplicate," he observed.
Dell would be Wal-Mart, of course.