What's wrong with Dell?

What's wrong with Dell?

Dell's run as the financial darling of the technology world may have come to an end after it announced it would miss quarterly revenue targets for the second straight period. It blamed a shortfall in its US consumer business and UK operations, but competition around the world and a changing market may also be dragging Dell back down to earth.

Investors punished Dell following its announcement, sending the company's stock down 8.28 per cent on the Nasdaq Stock Exchange. They were reacting to a press release issued by Dell in which the company outlined its expectations that third-quarter revenue would fall short of earlier targets. At the same time, Dell disclosed plans to take a $US450 million charge to cover the expected costs of replacing faulty capacitors in its OptiPlex desktops, a write-down of excess inventory and layoffs in its Texas and UK operations.

Growing Concerns

Three financial analyst firms - Moors & Cabot, Bear Stearns, and UBS Securities - downgraded ratings for Dell. In a report, Moors & Cabot analyst, Cindy Shaw, cited growing concerns about Dell's performance in many different sectors of its business.

"We have previously expressed concerns about Dell's competitive position in servers, upselling challenges and customer satisfaction. To this list we now add: a stall in PC unit share gains in Q3 [according to Gartner], concerns Dell has not handled recent product failures well ... and another quarter of decelerating revenue growth," she wrote.

Dell has made its mark in the technology industry by growing at phenomenal rates even amid the rubble of the dotcom bust in the early part of this decade.

The company's famous dedication to inventory management, build-to-order products and aggressive cost-cutting has allowed it to become the worldwide leader in PC shipments and a considerable source of pain for traditional server vendors such as HP, IBM and Sun.

In 2002, Dell set a goal of reaching $US60 billion in revenue by its 2007 fiscal year, which would have doubled the company's yearly revenue at the time. In February, CEO, Kevin Rollins, said the company would reach that goal in its 2006 fiscal year, which ends this coming January, and set a new goal of $US80 billion in revenue by 2008 or 2009.

But the company now appears unlikely to hit $US60 billion in revenue this year. Assuming it takes in $US13.9 billion in the third quarter, the number it cited in its press release, Dell will have brought in $US40.7 billion in revenue during the first three quarters of its 2006 fiscal year.

Even though the last few months of the calendar year are considered the best period for PC and server sales, Dell would have to take in $US20 billion during the quarter to hit Rollins' goal. That would be a 49 per cent increase over quarterly revenue in the same period last year.

Even though Dell cited slowdowns in its US and UK businesses as problems areas, Dell could also be missing out on accelerating growth in parts of the world where it does not dominate the market, analysts said.

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