Dell considers Sub 1K box:
Dell Weighs Strategy of Offering
Computers Priced at Under $1,000
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Dell Computer Corp., its stock suddenly buffeted by slower sales growth,
is considering moving into the hot market for computers priced at $1,000
or less, in a strategy analysts say could mean trading profits for sales.
The fast-growing company surprised Wall Street on Tuesday with an
admission it had clung too tightly to prices in the quarter ended Jan. 29,
sacrificing sales to maintain margins and profits. While profits rose 49% in
the latest period, its sales climbed 38%, well below the 56% average gain
in the last two years. Shares in the Round Rock, Texas, computer maker
fell $7.1875, or 8.1%, to $81.5625 in Nasdaq Stock Market trading
Wednesday.
Chief Executive Michael S. Dell said the company has been edging closer
to the low-priced machines, a market segment it has avoided because of
its skinny margins; he insisted "we actually are" addressing demand for
low-cost machines. "We're increasingly participating in that segment.
We've got $1,199 machines now," said Mr. Dell.
A spokesman for the company said its
review of the low-cost market is spurred
by a belief that it can use its
now-established Internet sales and
support to keep expenses low and
maintain traditional profit levels.
Personal computers priced under $1,000
now account for the lion's share of
demand and are increasingly affecting
corporate PC prices. In the last quarter, the under-$1,000 machines
accounted for 13.2% of all sales and 100% of the unit growth from the
third quarter. Indeed, the rise of sub-$1,000 machines has dramatically
slowed overall revenue growth. World-wide PC revenues are expected to
increase just 3% this year to $172 billion, while unit shipments are
projected to rise 16% this year.
"The PC manufacturers are between a rock and a hard place. Growth isn't
astronomical, and prices are coming down," says Aaron Goldberg, vice
president at market researchers ZD Market Intelligence. In part, he says
software demands haven't kept pace with the rapid gains in processor
power. "The customers realize this, and they're going for lower-cost
machines," said Mr. Goldberg.
Analysts say that trend could force
Dell to accept lower profits in order
to stoke its sales. Dell's lean
inventory and custom manufacturing
have been a major advantage over
rivals. Unlike rivals, which typically
kept 45 days of PC inventory at
dealers, Dell has had the luxury of
using some of the savings to pad
profit margins. However, now that
memory-chip prices have begun to
rise again and rivals are managing
their inventory better, Dell's relative
advantage is lost, say analysts.
Don Young, vice president at PaineWebber Inc., says Dell "has to give up
gross margins or revenue growth. Clearly, it's choosing the latter." He says
the company can't count any longer on rapid growth by selling newer
products such as notebook or PC servers to existing customers. It has
"saturated" its customers with such products, he says.
Will low-cost PC sales spell the end of Dell's stellar record? Some on
Wall Street believe it has put together a way to target lower-profit
products without significantly lowering profits. In recent months, the
company has begun to beef up its sales of software, networking gear and
computer add-ons such as printers alongside its computers. "Given Dell's
management track record, it's a pretty good bet they will find new growth,"
said Phil Rueppel, vice president at BT Alex. Brown.
Mr. Rueppel expects the company's revenue
increases will slow to a 35% to 40% annual
level. The reason it cannot sustain the 50%
annual increases is that the market has consolidated among fewer and
better-run companies. "My sense is the PC industry is just getting more
and more competitive."
Dell has an advantage, however, with its Internet sales, now running at a
$14 million-a-day rate. As part of its effort to use the Internet more, the
company is also revamping its service operations to allow customers to
search its Web site (www.dell.com) for answers to common problems --
and converse with other Dell customers for potential remedies.
The new approach should allow the company to service more customers
without having to rapidly increase its service force. In the past, the
company has said it avoided low-cost PCs in part because novice buyers
who tend to purchase lower-cost machines added inordinately to service
costs.
Vadim Zlotnikov, senior technology analyst at Sanford C. Berstein & Co.,
says the company's investments in Internet-based self-service can reduce
the costs associated with selling to novice buyers. "They felt the spending
on information systems, on an Internet site has reduced the cost of serving
these customers. If this is true, and they believe it to be, an incremental sale
is incremental profit," he says.
Mr. Zlotnikov expects the company to reignite sales to a 42% annual
growth rate, while only modestly lowering the 22.4% gross margins it
recorded in the last quarter. "If Dell can significantly reaccelerate the
revenue growth, the stock will go back to its highs," he adds.
________________________
Will this signal Dell's jump of ship to K6x for sub 1k machine OR help intel regain the low end market share by using Celeron only? |
