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DELL'S NET NOT NET-DRIVEN
By Owen Thomas
Red Herring Online
November 13, 1998
Dell Computer (DELL) showed chinks in its armor when it unveiled its latest quarterly reports, and some unnerved investors began to bail.
What did the Round Rock, Texas-based PC manufacturer do wrong? Nothing, apparently. Revenues soared from $3.19 billion in the same quarter last year to $4.82 billion; earnings popped 55 percent to $384 million.
Earnings per share, at $0.28, showed the almost-obligatory one-penny upside, though whisper numbers had predicted bigger earnings.
But the market slammed Dell shares down $5.25, closing at $63.94. The 7.6-percent drop was a minor setback in a stock that has seen a tremendous run-up since October's market woes, but it was enough to scare momentum investors, some market watchers observed.
Analysts, too, turned skittish over the stock's high price. Merrill Lynch reinstated coverage of Dell with an Accumulate rating. Hambrecht & Quist downgraded the stock to a Hold, and Piper Jaffray knocked it from a Strong Buy to a Buy rating.
What may really scare Main Street and Wall Street, though, is that Dell's business seems to be approaching a steady state. Despite the growth in numbers, Dell's mix of business hasn't changed much in recent quarters. Enterprise systems -- mostly high-end servers -- only grew from 12 percent to 14 percent of sales. And sales in Asia held steady at 6 percent.
Also, Dell is seeing new competition to its low-cost direct model. Compaq (CPQ) took the plunge into direct selling this week, selling a line of desktops to consumers through phone and Internet sales at prices competitive with those offered by resellers, who have historically accounted for most of Compaq's sales.
One spot of good news for Dell is that average PC prices have flattened out, after dropping precipitously in the past two years. Dell has avoided price competition in the sub-$1,000 PC market, maintaining an average selling price near $2,400.
Net strategies
In announcing its earnings, Dell touted the growth of the Net as a sales channel, noting that sales have risen to $10 million a day through www.dell.com. That's 20 percent of all Dell sales.
Scott Eckert, director of Dell Online, says the company aims to sell 50 percent of all its PCs through its Web site soon. Corporations, especially, have shifted much of their buying to the Web, following the lead of home PC buyers.
But Dell's online efforts have focused on cost savings, not generating new revenues. "In the real world, it's expensive to maintain a relationship," says Mr. Eckert.
Dell recently struck a deal with Excite (XCIT) to place a co-branded home page on its Dimension line of computers, in the hopes that Dell customers would return often for Excite's Net search and news features, and occasionally get information on Dell's products and services.
The company is also launching a search service with AskJeeves that will allow users to enter plain-English queries for technical support online.
Dell could conceivably use its relationship with customers to market additional products and services under the Dell brand, or even allow outsiders to market to its lucrative customer base. "We're leaving money on the table because we want to protect [the customer] relationship," says Mr. Eckert. He adds that selling customer information would go against a policy in place since the company's founding.
"We're trying to deliver a message to the market that we're an Internet company," Bob Langer, another Dell Online executive, told the Herring in September. But until the company can show how it will use the Net to boost revenues, not just shave costs, it's not clear the market will buy Dell's direction.
RELATED LINKS
As Dell takes on services, the Internet will prove a key delivery mechanism.
DISCUSSION / FEEDBACK
Will Dell's plan connect with consumers? Make your predictions on our public companies message board.
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