Dell to get served by AMD
No. 1 computer maker says it will use No. 2 chipmaker's products in servers for first time; earnings and revenue meet forecasts.
NEW YORK (CNNMoney.com) - Dell reported fiscal first-quarter earnings Thursday that fell in line with the lowered forecast the company issued last week, and said it will introduce servers with AMD chips, a first for the company, which has previously only used Intel chips.
Dell (Research) also acknowledged that it has lost ground to competitors and is making key changes to re-invigorate growth, including cutting prices and improving customer service.
Investors rewarded the news, sending Dell shares up over 3 percent in Inet trading after hours.
"It was a bit of a mea culpa call," said Mark Lanyon, an equity analyst at Morningstar. "They admitted that they had been outflanked by competitors."
Lanyon, who maintains a "buy" rating on Dell, said the steps Dell has outlined to regain lost market share against rivals including number-two computer maker Hewlett Packard (Research) look promising, but he added, "It still remains to be seen whether these plans will re-ignite the type of growth investors are looking for."
Dell has missed sales and earnings expectations for several quarters as it has grappled with slowing growth in its core markets and increased competition from HP, which posted a 45 percent, pro-forma quarterly profit gain Tuesday. Shares of Dell have plummeted 40 percent in the last 12 months, while shares of HP gained 52 percent over the same period.
Analysts also welcomed the news that Dell will start using AMD chips in their servers, though Morningstar's Lanyon said the larger significance of the announcement does not have to do with economic impact - rather, it's that Dell is signaling a willingness to shift away from long-time alliances with suppliers in order to deliver the best technology to customers, he said.
Dell said it will introduce new AMD Opteron processors in its high-end multi-processor servers by the end of the year. Many industry analysts have speculated that Dell would make such a move in light of AMD's market share and performance gains over the number-one chip maker Intel, which until today exclusively supplied the microprocessors in all of Dell's computers. Shares of AMD (Research) surged up 14.5 percent. By contrast, shares of Intel (Research) fell 5 percent.
Dell CEO Kevin Rollins said on a conference call to reporters that Intel will remain the company's premier chip supplier and that the product category that will use AMD chips is fairly small.
"Intel has been a great partner and is going to stay a great partner," said Rollins on a conference call to reporters. "We will still be launching a broad base of Intel products (for) desktops, notebooks and servers that we're excited about."
But some analysts pointed out that Dell is planning to implement Opteron chips in some servers by the end of the year - by which time Intel is expected to close the technology gap between it and AMD with its new server chips.
"You could argue they are late to the game in throwing in Opteron chips," said Lanyon.
Owning up to tougher competition
Rollins also acknowledged that the company faced tougher competition during the quarter than it had anticipated.
"The market intensified more than we understood or acknowledged," he said during a conference call. "Some of our competitors were stronger than we thought, selling prices declined more rapidly in transactional space, customers are more concerned about service and support ... we have laid out a strategy that would address these areas."
Rollins said the company is focusing on three key areas - customer service, product leadership and productivity and cost improvements - to re-invigorate its business model and juice growth.
Dell is investing more than $100 million in its customer service operation, including hiring more than 2,000 new sales and support personnel in the U.S. The company has added call centers in Ottawa, Canada, Oklahoma City, Manila and Nashville, Tenn. Dell also said it plans to have opened 14 new manufacturing, call center and design and development facilities by the end of the current fiscal year.
The company said it is accelerating plans to record $3 billion in cost improvements during the year, in part by cutting component costs, but Rollins said it does not plan to cut jobs. On the product front, Dell said it plans to unveil a new generation of servers as well as new storage products, desktop and laptop computers, and printers.
But he said the company is firmly committed to its direct-to-consumer, build-to-order model.
"We think this year we will be revitalizing the strength and power of direct model for our customers, through aggressive pricing and great value with new technology," he said. "We're more committed than ever and we'll be telling that story in new and exciting ways this year."
The Round Rock, Texas-based computer maker earned 33 cents a share, down 11 percent from last year, and reported sales of $14.2 billion, a 6 percent gain from the year-earlier quarter. The company's quarterly profit fell 18 percent. News of the AMD addition and of the changes to its business overshadowed the company's financial results, which it had essentially pre-announced last week.
Dell had originally said it would report $14.2 billion to $14.6 billion in revenue and earnings per share of 36 to 38 cents for the quarter before revising the forecast downward last Monday, citing aggressive pricing. But the company said it expects the price-cutting to have long-term benefits.
Dell also said it is ending the practice of giving specific quarterly forecasts for revenue and earnings per share, saying the leading maker of personal computers will instead focus its forward-looking statements on "long-term specific company and industry factors influencing performance," the company said in a press release.
But the company said results for the current quarter will be similar to those of the first quarter.
Analyst Shaw Wu of American Technology research, who maintains a "buy" rating on Dell, said that the company's indication that it expects similar revenue in the current quarter is positive.
"Investors were expecting a lot worse than that. I think that's why the stock is reacting positively," he said.
But he noted that the company was vague on how it plans to cut $3 billion of costs without reducing head count, a sentiment other analysts shared.
"The plan is still not clear. They talked about how they have to spend, too," he said, referring to the company's $100 million investment in customer service and its price cuts. "Are they growing, or are they cutting? That is the confusion."
Wu does not own shares of Dell, and his firm has no banking ties to the company. Lanyon does not own shares of Dell, and his firm does not do investment banking.
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