A cold wind sent a shivers through the NASDAQ on Friday as Dell, the worldâ€™s largest personal computer maker downgraded its forecast the upcoming quarterly report.
This was the fourth consecutive quarter the Texas-based company issued a profit warning. On top of this, its failure to meet Wall Streetâ€™s expectations disquieted investors.
Shareholdersâ€™ reaction was swift and merciless. Dellâ€™s share price fell 9.9 percent, wiping out $5 billion in market value in a single day. The sell-off ended with the stock closing at $19.91 on Friday, its lowest level in five years.
Dell's stumble in the lastest quarter and its ongoing efforts to regain the poise the company is known for highlight larger problems facing the computer industry and missteps analysts say Dell must correct to survive.
Although Dell pointed to an â€˜aggressive pricing in a slowing commercial market worldwide,â€™ many analysts blame management. They say that a sharp drop in revenues has come about because of various factors, including the fact that Dell has become a victim of its own success, that the company currently lacks products offering the AMD microprocessor, and that its customer service is poor.
Despite these obstacles, there are rays of light that can once again boost its sagging operating margin. Analysts say the company needs to alter its management mindset, release products which include AMD parts and continue to improve its customer services. As it prepares to release its earnings report, the focus is on whether Dell, once the darling of the market, can realign expectations with reality.
INDUSTRY SLOWDOWN. Technology industry research firm IDC reduced its projection for PC sales growth, by 1.1 percent in the U.S. PC market for 2006, stating that the room for growth had peaked. This was unwelcome news for Dell, given that its American operations made up 64 percent of its $56 billion revenue by the end of its 2006 fiscal year which ended in February. For the latest quarter, revenue came up short of the
The high penetration in a maturing market was further compounded by the uniformity of the PCs being sold.
Analyst and managing VP at Gartner research Charles Smulders stated that â€œ[l]ack of differentiation between PC vendors and a lack of compelling innovative featuresâ€ had contributed to Dellâ€™s decline.
Itâ€™s a fact that could have figured in Dellâ€™s decision to engage in â€œaggressive pricing.â€
The rush by the two top chip makers, Advanced Micro Devices (AMD) Inc. and Intel Corp., to release new processors within a short period of time is hurting PC makers such as Dell. â€œIn the second quarter of 2006, Intel (is) bringing forward its launch of its next generation CPUs and chipsetsâ€, said Smulders. â€œ(This) forced vendors with older inventory to reduce prices to clear stocksâ€.
LOOKING INWARD.Compounding its woes, analysts had pointed out that the Texas-based firmâ€™s past success came back to haunt it. From 1995 to 2005, the firmâ€™s earnings per share (EPS), grew at 33 percent, compared to its closest competitor Hewlett-Packard, whose EPS grew at negative 3 percent during the same period. In Fridayâ€™s forecast, Dell said its earnings expectations for the second quarter would be approximately 21 to 23 cents. Investors saw the report as abysmal.
The company had previously maintained an exclusive relationship with Intel, carrying only its products to the exclusion of AMD chips in both the server and non-server market. However that changed earlier this year, when Dell said it would begin making AMD-based servers. Principal analyst at Gartner Mikako Kitagawa feels the server-only agreement is detrimental. â€œDell loses a growth opportunity in consumer and SMB area because of lack of AMD product,â€ Kitagawa said. This figures hurt the firm, contributing to its single digit growth in the U.S. this year.
Dellâ€™s customer satisfaction had plummeted due to poor customer service. In the second quarter of 2005, the firm suffered a sharp drop in the ACSI index (American Customer Satisfaction Index), down 6 percent to 74, according to the University of Michigan. â€œCustomer complaints are up significantly with long wait-times and difficulties with Dellâ€™s call-center abound,â€ were the reasons for the dissatisfaction, according to Professor Cales Fornell of the University of Michigan.
RAYS OF HOPE. Smulder says that to improve, the management mindset at Dell has to change to suit changing PC market conditions, all while building profitable products. â€œ(The firm has to) reset financial expectations with the financial markets (and) continue to broaden its product and service portfolio away from PCs to higher margin products.â€
Also, the companyâ€™s decision in May to use AMD Opteron chips in its multiprocessor servers signals a shift in the company toward satisfying customer demand.
In response to stinging criticism about its customer service, Dell has already announced plans to spend $100 million to repair its bad reputation. â€œAll of our initiatives are focused on providing the best value, experience and products to customers every day, which will maximize shareholder value over the long term, stated Dell CEO Kevin Rollins. The company must address those factors to overcome the negativity that has plagued its stocks in recent quarters. However, investors may not be willing to wait too long, as the impatience over its latest announcement has shown.