Dell's run as the financial darling of the technology world may be coming to an end.
The company recently acknowledged it will miss its quarterly revenue target for the second straight period. Dell blames a shortfall in its U.S. consumer business and its U.K. operations, but competition around the world and a changing market may also be dragging Dell back down to earth.
Financial Challenges
Dell has made its mark in the technology industry by growing at phenomenal rates even amid the rubble of the dot-com 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 Hewlett-Packard, IBM, and Sun Microsystems.
In 2002, Dell set a goal of reaching $60 billion in revenue by its 2007 fiscal year, which would have doubled the company's yearly revenue at the time. Last February of this year, Chief Executive Officer 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 $80 billion in revenue by 2008 or 2009.
But the company now appears unlikely to hit $60 billion in revenue this year. Assuming it takes in $13.9 billion in the third quarter, the number it cited in its press release Monday, Dell will have brought in $40.7 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 will have to take in $20 billion during the quarter to hit Rollins' goal. That would be a 49 percent increase over quarterly revenue in the same period last year.
Market Changes
Rollins is expected to shed more light on Dell's challenges this year in scheduled meetings with financial analysts this week. However, analysts already have their own ideas. Even though Dell cited slowdowns in its U.S and U.K. 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.
HP has a stronger presence in Europe than does Dell, and Dell is under significant pressure from Lenovo in Asia, according to a recent report by Moors & Cabot analyst Cindy Shaw. Dell had been gaining share in some of these markets but appears to have given back some business in the most recent quarter, according to Roger Kay, president of Endpoint Technologies Associates.
Dell's market share in the Asia-Pacific region, for example, declined in the third quarter compared to the second quarter, while its competitors all gained market share during the same interval, according to IDC. The company's unit shipments grew strongly compared to the previous year, but there are questions about how well Dell's direct model will work in rural areas of Asia-Pacific where people are used to buying products in local retail establishments, Kay said. Right now, Dell is focusing on large cities in China and ceding the fast-growing rural areas to companies such as Lenovo and HP, he said.
Dell has also been hit with a customer backlash over declines in product quality. Numerous Web logs dedicated to highlighting problems with Dell products have appeared this year, and the company's customer approval rating plunged in a survey conducted by the University of Michigan.
The situation with the OptiPlex desktops will not help that reputation. Faulty capacitors on the motherboards of certain OptiPlex desktops can fail over time with no real warning, a Dell spokesman said Monday. The company does not plan to recall the units, but it will replace the motherboards of any units that fail, he said.
Stay Tuned
On the server end of Dell's business, several converging trends such as virtualization, blade servers, and sophisticated server management software are presenting new challenges for a company that is used to selling servers as commodities, said Gordon Haff, principal analyst with Illuminata.
"Dell has had a really good run selling essentially cookie-cutter rack-mount servers," Haff said. "But the era of solving problems by just buying more boxes is coming to a close."
Dell has sought to change its image this year, starting with its April analyst meeting, when it press and analyst attendees got many details about its growing services and printer businesses, but learned little about PCs and servers. The company urged financial analysts to look at more pieces of Dell's business than just its PC and server sales in order to get a true picture of the company's health, perhaps foreshadowing the current situation.
Analyst Kay says he hopes CEO Rollins will be more forthcoming.
"Dell should err on the side of fuller disclosure here, rather than just blaming the most obvious visible issues for the shortfall," he said.
Financial Community Reacts
Investors have recently punished Dell for its slip. The company last week released a statement that it expects third-quarter revenue will fall short of earlier targets. The company also disclosed plans to take a $450 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 U.K. operations.
Three financial analyst firms--Moors & Cabot, The Bear Stearns Companies, and UBS Securities--downgraded their ratings for Dell.
"We have previously expressed concerns about Dell's competitive position in servers, upselling challenges and customer satisfaction," wrote Moors & Cabot analyst Shaw. "To this list we now add: a stall in PC unit share gains in 3CQ05, concerns Dell has not handled recent product failures well ... and another quarter of decelerating revenue growth."