Dell to Use Chip Made by A.M.D.
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By DAMON DARLIN
The New York Times
May 19, 2006
Dell, which has used only Intel processors until now, announced yesterday that it would begin using a chip made by Advanced Micro Devices, as part of a broader plan to improve its flagging sales and market share.
Dell said that by the end of the year, it would start using an A.M.D. Opteron chip in one of its high-end servers with multiple processors. "It's a fairly small category," Kevin B. Rollins, chief executive of Dell, said on a conference call with analysts.
He did not rule out using A.M.D. chips in Dell's PC's or in other servers, but he said that Intel would remain the supplier of the "vast majority of processors we use." Mr. Rollins outlined several personal computer products that the company planned to introduce this year, and all of them will use Intel chips.
Mr. Rollins made the announcement after the company released its earnings for the first quarter. As the company said in a preliminary statement last week, net profit in its first quarter ended May 5 was $762 million, or 33 cents a share, down 18 percent from a year earlier. Revenue grew 6 percent, to $14.2 billion, from $13.4 billion a year earlier, helped by overseas growth.
Dell, the world's largest seller of personal computers, had previously said growth suffered in the quarter as it cut prices to gain market share and spent more on improving its customer service. "The competitive environment has been more intense than we had planned for or understood," Mr. Rollins said.
Dell's news about the Opteron chip, made after the market closed, sent shares of A.M.D. as much as 13 percent higher, after they had closed at $31.35 in regular trading. Intel's shares, by contrast, were down almost 5 percent in after-hours trading after closing at $18.65. Shares of Dell rose more than 4 percent after hours; the stock closed up 1.4 percent, at $23.95, in regular trade.
Analysts on the conference call wondered why Dell had waited so long to add an A.M.D. chip to its products. Mr. Rollins said the company had been watching the market to see what customers who buy its servers wanted. "A.M.D. was very successful, so we are using it," he said
Mr. Rollins also laid out a plan to improve the company's growth. He said Dell planned to accelerate efforts to reduce costs by $3 billion so it could continue to reduce prices where needed. "We've allowed our growth essentially to come to a stall," he said. The savings will come from improving quality to lower warranty costs, and from changes in materials and components, he said
Mr. Rollins said the company did not plan to cut it work force. Indeed, Dell also said it would spend more than $100 million on improving its customer service, which it acknowledged had deteriorated and affected the company's image and its sales. It said it hired 2,000 new sales and support staff and retrained 5,000 others.
The latest announcements did not eliminate analysts' concerns over the company's growth. Laura Conigliaro, an analyst with Goldman Sachs, said: "It is clear that Dell is working through a lot of changes and there is a lot of uncertainty connected with those changes."
William Shope, an analyst with J. P. Morgan, said, "They didn't give us any real detail" on cost-cutting. But he noted what he called a sea change in the way Mr. Rollins and other executives discussed the company's prospects. "There was a mea culpa and there was some planned action taken," Mr. Shope said.
He said that the switch to A.M.D. in a small portion of the company's server line would not do much to solve its problems, but that it was another sign that the company was willing to change. Ms. Conigliaro, however, said it was "too late for Dell to gain an advantage" from the Opteron chip, which is regarded as superior to current offerings by Intel.
Dell's chief rival, Hewlett-Packard, has offered A.M.D. chips for a decade; they are used in more than 30 of its PC and server product lines. Analysts say the A.M.D. chips have given Hewlett's customers more choice over price and performance.
Hewlett did not quite win bragging rights over Dell this earnings season, though. Dell's desktop PC sales grew 3 percent in the quarter, while Hewlett's grew 1 percent. But in laptops, the hottest growth category, Dell grew only 12 percent compared with Hewlett's 27 percent.
According to IDC, a market analysis firm, Dell's worldwide market share for PCs in the first three months of the year was 18.1 percent, down from 18.6 percent in 2005, while Hewlett's market share rose to 16.4 percent from 15.1 percent in 2005.
In terms of profits, though, Dell still has a clear edge. Its operating profit margin of 6.7 percent for PC's exceeds Hewlett's margin of 3.6 percent. Dell's margins used to be fatter — they were 8.8 percent in the year-ago period — but it still has a distinct pricing advantage over its competitors. Mr. Rollins said that accelerated cost-cutting would help to improve margins.
Dell, which is based in Round Rock, Tex., also said that growth in overseas markets would be increasingly important. It said revenue from China grew 29 percent, about twice the rate of the rest of the industry there. Revenue grew 54 percent in Korea and 40 percent in India.
In addition, the company said that revenue from printers increased by 10 percent.
Mr. Rollins also said Dell would no longer give specific forecasts on quarterly results. In three previous quarters, the company has failed to meet its forecasts. |
