Dell’s Hot Summer of Cool Growth

Woe to Dell. Piling on about the world’s #1 PC maker is the next act for analysts and tech pundits alike after its woeful quarterly earnings report.

After all, when you announce that net income dropped by 51 percent to $502 million ($22 per share) in the second fiscal quarter of 2007 (which just ended), and that the SEC’s peering into your accounting practices — on the heels of a massive recall of 4.1 million notebook batteries, well, all that’s left is to release the hounds.

Wire services noted that Goldman Sachs cut Dell’s stock rating from “hold” to “sell” too. When “hold” is already code on Wall Street for “sell,” that’s gotta hurt. Shares slid by over 2 percent to close at $22.16 the next day.

Not only that, Lenovo, the #3 PC maker (behind Dell and HP), announced that it just hired away a couple of Dell executives to help out in its Singapore and Japanese offices.

Analysts are concerned about the operating margin for Dell, too. It went from 8.7 (in last year’s second fiscal quarter) to 5.1 percent inside of one year. So Dell’s cost and price slashing aren’t exactly doing the trick.

Bear Stearns, for example, is calling Dell’s outlook cloudy, at best, in the face of slowing market growth and a diminished cost advantage:

“Further, Dell’s strategy, execution, and visibility are lacking as 1) price aggression failed to materially accelerate unit growth, 2) pricing actions didn’t drive sufficient demand elasticity (yet eroded profitability), and 3) Dell’s ability to strike a better balance b/t growth and profits remains uncertain.”

Jim McGregor, principal analyst with research firm In-Stat, looked at the deal with AMD that Dell also pushed out just ahead of the earnings news, and saw something not to like.

He noted that, after years of an exclusive deal to use Intel as its x86 chip supplier, Dell announced it would release Dimension desktop models powered by AMD next month and AMD-based servers later this year.

“The one remaining aspect that is not clear is how the AMD announcement will affect Dell’s relationship with Intel and the valuable Market Development Funds (MDF) it has received from Intel in the past or if AMD will be funding any market development efforts with Dell.

“Considering the negative political and potentially legal backlash against these funds that are now under investigation in Germany and several other countries, this funding is sure to play a smaller role in making processor decisions in the future.”

So queue the timpani drums from the Star Trek soundtrack as we fade to commercial (perhaps without the Dell commercials customers complained about) then return to the drama that asks: What’s up with Dell?

It’s the next PC era, that’s what.

As much as Bill Gates likes to say the PC era is just beginning, I’d argue that the PC era has just discovered a few more gray hairs (in the U.S. markets at least).

Dell’s results are more evidence of the quickening pace of change underway in the PC industry. It’s not as though the industry (or Dell for that matter) are singing Old Folks’ boogie just yet, but it ain’t a kid anymore.

To be sure, the company has plenty of bright spots. Unit shipments rose 22 percent and notebook revenue is up by 8 percent. And overall revenues rose by 14 percent in the quarter. It’s still the king of the PC makers in market share.

But it’s got a surging HP to contend with, which just announced strong sales in its PC division, and number 3 Lenovo hungry to make something of its purchase of IBM’s money-losing PC division, and turn a profit itself. Sales in Asia are where the action is.

Sam Bhavnani, PC analyst with Current Analysis, sees similar slowing trends accelerating in his stats. He finds that, despite being super aggressive in price, PC demand growth is slowing down.

This is not the result of the wait for the next Windows, Microsoft’s Vista, to hit the market, “but perhaps a wider slow down in overall demand,” said Bhavnani.

Charles Smulders, managing vp in Gartner’s client computing group, sees similar issues contributing to Dell’s current problems, such as sharp falls in PC average system prices, demand weakness in the large business market in U.S. and Europe and stronger competition, especially from a surging HP. But he notes that, “as mobile form factors become more popular, experiencing the product before purchase becomes more important,” which makes selling direct more difficult.

Dell’s sales results broken out by global regions show where all roads are leading for growth. Sales in Asia were up by 27 percent, compared to just 3 percent in the United States in its just-concluded quarter.

After noting the recent 25th anniversary of the PC, the industry is looking for its next wave of growth in PCs and laptops (before more sophisticated handheld computing devices mature and open up new possibilities in the U.S. market).

Call it the next big front opening up for the computer maker, whose business model still remains the envy of the world. It’s the next dramatic growth story in the industry that needs no soundtrack.

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