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August 11, 2005

Sales hiccup as Dell gobbles market share

Dell Inc was overly aggressive in chasing higher market share during the past quarter and its lower product prices hurt revenue, executives said yesterday.

By CBR Staff Writer

However, the company’s market-gobbling strategy, though poorly executed in recent months, would serve it well in the long run, particularly in markets outside the US, chief executive Kevin Rollins said on a conference call.

Even though Rollins said the company mis-executed its strategy on gaining volume from lower prices, revenue climbed 15% to $13.4bn during the quarter. This fell short of analysts’ expectations of $14.6bn.

Thanks, in part, to strong services revenue in the quarter, profit grew 28% to $1.02bn, or 41 cents a share, from a year ago, which hit Wall Street targets.

In recent months, the world’s No. 1 PC maker had cut some of its notebook prices to below $600 in order to snatch market share from chief rival Hewlett-Packard Co and others. The company priced aggressively across its market segments, Rollins said.

Dell’s lower prices were not in response to an exasperated industry-pricing problem, according to Rollins, who said the industry’s pricing pressures remained at roughly the same level they had been for the past couple of years.

The problem of pricing a little more aggressively was our problem, he said.

Dell’s strategy is to attract customers with lower-than-market prices in the hopes they would load up on additional products and services or end up spending more on bigger machines at some future point. During the quarter, this did not happen to the degree the company had hoped, Rollins said. We didn’t get the up-sell in the consumer business that we normally get, he said.

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Rollins stressed several times throughout the call that the company’s misstep was not the result of pricing pressure from HP or others. We essentially left money on the table and that’s where we’ll get back in line, he said. We got too aggressive and passed the elasticity mark.

The company’s lower prices, however, were somewhat offset by enterprises and consumers continuing to transition from desktop to higher-margin notebook PCs.

Dell also enjoyed more than 20% revenue growth in markets outside the US and in its enhanced services and peripherals businesses, Rollins said.

Non-US revenue grew from 34% to 39% year-over-year, with Asia Pacific and Japan leading the growth. Dell is now the No. 1 server vendor in Japan and China, Rollins said. The company’s sales in Europe grew 21%, trailed by 12% in the Americas, said CFO.

The lone exception in the US for positive revenue growth was the public segment, especially federal government business, which shrank more than Dell had expected.

We didn’t expect to see the kind of double-digit decline in the federal business that we had, said CFO Jim Schneider. Federal spending revenue at Dell was off maybe $100m during the quarter, he said.

Rollins said Dell, which historically has been big in the US government’s defense department, is broadening its sell base across the federal government.

While revenue may have disappointed, Dell did grow market share. Notably, it gained 3.5% in notebook market share in the US and extended its server leadership in the country, according to independent research figures cited by the company.

During the quarter, Dell reached an industry-record 9.1 million computer system shipments, which included 2.7 million notebooks.

Sales of Dell software and peripherals, which includes printers and displays, blew past the $2bn mark for the first time.

Looking ahead, Rollins said steady enterprise sales, seasonal back-to-school buying from consumers and growth in markets outside the US would drive Dell’s business during the current quarter.

For Q3, we intend to drive balanced growth but with more discipline around selling price, Rollins said.

Dell guided between $14.1bn and $14.5bn in revenue for the current quarter, with earnings in the 39-cent to 41-cent-per-share range. Wall Street was hoping for $14.6bn in sales and 41 cents.

Also, Robbins said there was anecdotal evidence of a channel build for PCs, but that he did not believe this would result in a terrible pricing phenomenon because it hasn’t in the past – despite knee-jerk reactions from industry watchers on previous occasions. He pointed to unnamed Dell competitors offering a free desktop PC with the purchase of a notebook.

But because Dell was in the midst of some pretty dramatic product transitions, he said if the channel was loaded up with older products, Dell would stand to benefit by coming to market with a fresh product line.

Rollins also said he still believed Dell had the potential to be an $80bn company during the next four years, reiterating a bold statement he made a few months ago.

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