The Dell story from the interactive edition. Can't find it in the paper edition.
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.
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