Dell downplays dependence on computer sales

Dell downplays dependence on computer sales

A casual observer of the IT industry who stumbled upon Dell's analyst meeting this month might have emerged slightly confused about the nature of the company.

The worldwide leader in PC market share spent very little time talking to financial analysts about its performance in the core business that accounted for about two-thirds of its revenue during its last fiscal year.

Dell's message was clearly designed to reassure the financial community that even if the PC market stagnates, it would continue to exceed expectations for quarterly growth, analysts said.

PC growth to slow

In recent years, the company has delighted the financial community by improving revenue and net income by about 20 per cent each quarter, compared to the previous year's quarter. With PC shipment growth expected to slow to 8 or 9 per cent over the next two years, and revenue growth in the category expected to be even weaker, Wall Street analysts are concerned Dell is about to hit the inevitable slowdown in growth that befalls mature companies.

To dispel that notion, Dell executives pointed to several different markets that will allow the company to increase its yearly revenue to $US80 billion by 2008 or 2009. The company recorded $US49.2 billion in yearly revenue during its fiscal year 2005, which ended January 28, and expects to post about $US60 billion in revenue during the current fiscal year.

For example, Dell cited the printing and imaging market, which the company thinks will be worth $US105 billion in 2005. But it did not discuss how closely shipments of printers were tied to shipments of PCs, director of industry analysis with NPD Techworld, Stephen Baker, said.

Dell often gave away free printers with purchases of Dimension desktop systems, or discounts laser printers for business PC customers, he said.

This made sense, because the revenue stream generated by replacement ink or toner cartridges for the printer quickly offset the cost of giving away the printer, Baker said.

But the PC business was what drove that revenue stream, not the printer itself, he said.

With slower PC growth expected this year, Dell might have been trying to soften the upcoming blow of relatively poor market share results during the current quarter, vice-president of client computing for IDC, Roger Kay, said.

Market share concerns

Over the last few years, Dell had made significant gains in PC market share at HP's expense during the year's first quarter, while HP chipped away at that advantage over the remainder of the year, Kay said.

Although Dell reaffirmed its guidance for the first quarter, Rollins said the PC business had been a little weaker than the company had expected.

If the company didn't post as strong a gain during the first quarter, it might not be able to increase PC market share over HP this year and therefore it would only be able to grow as fast as the entire market, Kay said.

IDC and Gartner would report PC market share estimates next week.

The financial community tended to overreact to bad news, he said. Should Dell fail to post those market share gains, the company could point to recent messages and remind analysts that the fluctuations of the PC market will have less of an effect on Dell's overall business going forward, he said.

Dell was at a turning point in its history, Kay said. Dell executives and public relations personnel were trying to manage the company's transition from a US PC vendor to a global enterprise IT vendor with the breadth of rivals such as HP and IBM.

Dell believes it is in the best financial shape of its life, and few analysts think the company would set a target of $US80 billion in yearly revenue if it wasn't very confident in its plan for reaching that goal. But financial analysts plan to wait and see if Dell can pull off this transition without significant contributions from its PC business.

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