Dell sets course for new destination

21 Apr 2005

Heavy storms on the way into Texas were certainly no portent of choppy waters at Dell’s annual analyst conference in Austin earlier this month. As representatives from the media, analyst firms and investment houses gathered to check on the company’s progress, the message was steady as she goes, with the company giving the impression of firm hands at the tiller as it steers a course through the technology industry.

Its latest journey — more likely to be another landmark rather than a destination — will take the company to a revenue target of US$80bn over the next three to four years, up from its current levels of US$49.2bn.

To do this it must shed in both perception and fact its image of being a mere PC manufacturer. During the event the company never missed a chance to point out that it is no longer a “box shifter”. Dell CEO Kevin Rollins said in his address: “For Dell, as we’ve diversified, the PC unit volumes are less indicative of the way our company will perform in terms of growth and profitability. While we’re still interested in PC growth, it’s not going to be the predictor of the company it once was.”

For good measure, he added later: “If the truth be told, we’re achieving scale in a broad range of categories that are going to move us beyond ‘Dell, the PC company’.”

In broad terms, those categories are: network servers, storage systems, printing and imaging, and mobile computing. Added to the technology are the services around those products, itself a rapidly growing area of Dell’s business. The day before the briefing, Joe Marengi, Dell senior vice-president, Americas, spoke of the “evolution of Dell from being a box company to being a trusted IT solutions provider”. Dell’s IT services arm currently brings home revenues of US$4.1bn for the company. Over the past six years, this side of its business has shown a compound annual growth rate of 30pc and it grew by 34pc in its most recent financial year. “We see nothing that would inhibit us from continuing that growth,” said Marengi.

In those product and service areas, supported by increased business from regions outside the US, Dell said it expects to continue to grow at rates even faster than its overall average.

According to Rollins, Dell’s emerging and core businesses continue to be profitable. He lectured the audience that the company’s growth would be founded on very solid ground. “It’s very easy to grow if you don’t care about those two elements — revenue and profits,” he said.

Dell chief financial officer, Jim Schneider, chipped in: “Today, we’re better positioned financially than probably at any point in time in this company’s history.”

For ease of comparison, Rollins broke down Dell’s current and anticipated revenues according to product category. Of the most recent US$49.1bn figure, about two fifths or US$20bn come from desktop systems. Close to one fifth (US$10bn) comes from mobility — notebook and handheld computers. Servers bring in around 10pc of revenue (US$5bn), storage around 2pc (US$1bn). Services currently account for close to 6pc while software and peripherals, a catch-all category that includes Dell’s printer business as well as sales of LCD and plasma TVs, results in sales of

Looking ahead, to its anticipated target, Dell forecasts that this mix will shift. Product categories other than desktops will bring in 65pc of revenue three years from now, up from almost 60pc of the current revenue mix. Dell has earmarked its services and software and peripherals divisions as strong performers in reaching this target.

The conference wasn’t all plain sailing for Dell: its interpretation of its own performance was challenged by analyst questions from the floor at the end of the session. It was pointed out that when seen from a different perspective, PC revenues are actually driving far more of the company’s revenues than it claims, once mobile computers and related PC services are factored in. Founder, Michael Dell, fielded the question by acknowledging that the company’s legacy was useful leverage to sell more products to the same customers.

“There’s no question that the client business is still important to us. We’re originating a lot of new business from those relationships. The base client [PC] is less and less important but it helps us generate a lot of these new activities.”

There is little denying that Dell’s progress is interesting to watch. Any company that has survived the rough seas of the past few years — especially in the cut-throat world of PCs, where rivals have been listing heavily — pretty well intact bears some scrutiny. On this point, Schneider remarked: “I don’t think there’s another company making a dime selling PCs.”

There have been some salutary lessons within that time too: Compaq (coincidentally also a Texas company) tried to break beyond the mould of a PC builder by buying the enterprise computing and services provider Digital, an entity that itself was swallowed by Hewlett-Packard. Of course, Carly Fiorina, the CEO who oversaw the latter controversial deal, is now no longer at the helm, having been ousted mere weeks ago.

Meanwhile IBM has decided to bail out of the business and sold its PC division to the Chinese firm Lenovo. Other PC providers shipping water include Acer and Gateway.

For its part, the good ship Dell is not casting glances at dry land, if Rollins’s remark is to be believed. “When we hit US$80bn, we will not close the door and go home.”

By Gordon Smith