Dell to Focus Less on PCs
Dell Inc. made its fortune and its name selling personal computers, but executives said Thursday that PCs would play a smaller and smaller role in the company’s growth.
Dell, which posted $49 billion in revenue last year, plans to gain market share in higher-profit and faster-growing products such as computer services in the U.S. and abroad and notebook computers, increase market share overseas and build up its business in printers, television sets and digital storage products, Chief Executive Kevin Rollins said.
“PC unit volumes will be less indicative of how our company will perform,” Rollins said at the company’s annual meeting with financial analysts. “We will sell many products that are PC-related, but not PC-dependent. So that won’t be the predictor that it was.”
Dell is not planning to ease up on its cost cutting and aggressive pricing of desktop and notebook PCs, but “we are not counting on them to drive company’s revenue growth,” Chief Financial Officer Jim Schneider said at the meeting.
Last year, about half of Dell’s revenue came from desktop PCs, but that probably will fall to 30% to 35% of sales in the coming years, Rollins said.
Rollins and other executives said they envisioned hitting $80 billion in annual sales within four years.
“I think it’s very achievable, even in a slowing IT [information technology] environment,” said Harry Blount, a computer analyst with Lehman Bros. “We can clearly get to $80 billion within a four-year time frame.”
Blount was among analysts who agreed that Dell would be able to broaden its product and customer base to reach the revenue goal.
“What it really reflects is the ability of them to attach other stuff -- storage and services, etc. -- to the installed base of their servers, because that’s one thing that Dell has historically not done very well in the past,” Blount said. “So it’s really just doing a better job in incremental sales of stuff they’re already doing.”
Dell uses its so-called direct model of selling computers directly to customers over the Internet or telephone to make money while most other computer makers struggle for profits. By cutting out the middleman, Dell can squeeze profit out of razor-thin margins.
Dell is likely to achieve its revenue goal through “continued expansion of their product line and less reliance on hardware,” said Nick Nilarp, an analyst with Fitch Ratings Ltd. “They’re following the trend of consumer electronics, and they know how to exploit margins and continue to grow profitable market share.”
Dell constantly lowers costs -- and price -- forcing rivals to reduce prices, often at the expense of market share. Dell’s biggest rival, Hewlett-Packard Co., has seen its U.S. PC market share tumble from just under 20% in 2000 to just under 16% today. Dell’s share, meanwhile, has grown from just under 12% to nearly 18%.
“We’ve been pretty good at holding margins,” Rollins said.
“When we see margins collapse or go into the negative, we shift our focus into something that’s more profitable,” he said. “Then we ask our teams to go back and figure why they can’t make more money or be more profitable in those segments. As soon as they get that refined, we dive back in again.”
Rollins’ comments came a day after Dell reiterated first-quarter earnings projection of 37 cents a share on revenue of $13.4 billion. Analysts expect Dell to record revenue of $57 billion in the current fiscal year, which ends in January, and $66 billion the following year, according to a survey by Thomson First Call.
PC demand is cooling, Rollins noted. The market is expected to grow about 10% this year, down from about 15% last year.
But he also said IBM Corp.’s decision to sell its PC division to China’s Lenovo Group and executive shake-ups at HP and Sony Corp. could be good news for Dell.
“For Dell,” he said, “turbulence means opportunity.”
