Dell CEO Bold On Growth, Murky On Specific Moves
By Clinton Barkdoll
WASHINGTON (Dow Jones)--Amid the Wall Street spinfest that has ensued since Dell Computer Corp. (DELL) reported lower-than-expected fourth-quarter numbers, Chief Executive Michael Dell has come under increasing pressure to pacify investors.
While playing his cards close to the vest, Dell hinted at some concrete plans for the future of his company in a recent interview with Federal Filings Business News.
"Our overall cost structure is much less than any competitor," said an unworried Dell. "You'll see Dell Computer continue to grow much faster than the rest of the industry," he added, noting that his company will beef up sales efforts this year in the $50 billion server market, where Dell has a mere 8% market share.
Dell also outlined an ambitious plan to increase his company's personal computer presence, which currently has a 9% global market share. "My goal is for us to have a 25% market share in four to five years and perhaps 40% in seven to eight years," said Dell.
In reaching these numbers, Dell hopes to achieve 50% of PC sales online. "We were at 25% in the fourth quarter and it keeps going up," Dell boasted without revealing a time frame for reaching the 50% target. Dell also "wouldn't rule out the possibility" of expanding via acquisition, but was quick to note that he "is not actively looking for a takeover target."
And what about the rapidly expanding market for sub-$1,000 PCs, which some analysts have cited as an area Dell has been slow to embrace? Dell likes to use an analogy of buying a car in explaining his philosophy about this question.
"You can buy a new car for $20,000 or $8,000," he said, "and you might find a used car for $150. But how will they perform?"
Dell thinks recent promotions, such as computers for $299, border on "consumer trickery."
"Maybe you don't get a modem, monitor, or software or maybe the service level is low," he speculated. "We could sell a computer for $400 but it wouldn't perform or run the software people want to use."
Nonetheless, Dell recently rolled out a $999 computer (monitor included) - the company's first entry into the sub-$1,000 computer market.
Although less expensive computers have a slimmer profit margin, Dell recognizes the opportunity of such machines. "Low-cost computers stimulate new buyers to enter the market," said Dell, "and new buyers stimulate growth." Dell added that computer prices are likely to continue falling. "As component costs come down, so too will the price of PCs."
BGR, if you know whether the current market share numbers he cites are for units or revenues, then I suspect you'll know if his 40% goal is for units or revenues.<g>
As for DEC, it had a very profitable minicomputer business in the mid-1980's. In fact, the company topped out in 1987 I believe. But while the minicomputer was providing DEC with great returns, it was being attacked from above and below, especially below. As high-end PCs became more powerful and relational databases capable of running on them became more powerful, the minicomputer priced in the 20s and 30s began to lose sales to microcomputers priced in the 5,000-10,000 level. As the pc became more powerful (and the software) while becoming cheaper, the minicomputer business reeled under the attack and margins eroded substantially.
The concern is that as the sub-$1,000 area sees substantial unit growth, companies will be capable of lowering selling prices even more as they pump out more powerful and cheaper units. While there will always be a base of users requiring more expensive/powerful units, that number as a % of the total declines. Hence, the decline in sales of over-$1,500 computers mentioned earlier. (story was on cnet I believe).
I concur with you that revenues are most important now in the pc industry. But, the industry is experiencing a dramatic shift in buying pattern and the question for this investor is not whether a company is well positioned or dominant, but what multiple I want to pay for the best company. The answer to that depends upon a host of factors, including how I believe the company will respond to competitive threats and what those responses mean for earnings and cash flow.
(note: I still have no position in DELL, long or short.)
Anyway, this is a good thread, despite the occasional religious fervor that finds its way into the discussion. Testing out different theories and ideas helps hone them. |
