August 05, 2006

Business Review: Dell

The blogosphere is full of discussion about customer service issues at Dell. Debbie Weil, of Blogwrite for CEOs, links some of the meaningful articles in the ongoing battle between bloggers and Dell.

With Dell stock trading at levels not seen in the past four years, and non-stop criticism from a small but vocal group of bloggers, I thought it made sense to dig into Dell's most recent 10-Q statement, and learn a little bit about the company's financial performance.

In the first quarter, Dell generated just over $14.2 billion dollars net sales, verses $13.4 billion dollars last year. That's the good news. Gross margin, as a percentage of net sales, decreased from 18.6% last year to 17.4% this year. Dell states that pricing declined faster than decreases in component costs.

Of interest are comments about how Dell plans to reduce costs. One comment states the following: "Cost savings initiatives include providing certain customer technical support and back-office functions from cost-effective locations..." In other words, Dell plans to continue outsourcing various jobs to locations where labor is cheaper, including back-office functions. A lot of us "back-office" folks watched technology jobs move overseas during the past decade. Now jobs in finance or human resources are considered fair game as well. Without a doubt, it is time for the back-office employee to have a career plan, given that leading companies like Dell are publicly stating that back-office jobs are heading elsewhere.

Last year's 10-K statement outlined other issues that Dell faces. The statement indicated that, at the end of fiscal 2005, an amazing 39,900 of 65,200 employees (61%) were located outside the United States, while just 41% of revenue is generated outside the United States.. Dell's third quarter is more dependent upon government contracts than other quarters. Consumer demand is greatest in fourth quarter.

Also of interest is the meteoric growth in top-line sales, since 2001. Sales increased from $32.2 billion in 2001 to $55.9 billion in 2006. This helps explain the hoopla surrounding sales that increased slowly in first quarter. Operating income was 7.8% of revenue in 2005, compared with 8.4% in 2004, illustrating that the profitability trend observed in Q1-2006 continues unabated.

Also interesting is that Dell no longer reports on sales to consumers. At the end of 2005, Dell generated 14% of sales from consumers, verses 15% in 2005, and 16% in 2003. Desktop revenue declined from 45% of sales in 2003 to 38% in 2005. This revenue was offset by small increases in mobility (laptops and mp3 players), software and enhanced services. In other words, Dell has basically maximized their desktop business. As customer behavior shifts to laptops, and as the mix of business further moves to businesses, Dell is highly dependent upon transitioning its desktop business clients to laptops to maintain successful and profitable growth. This transition will largely determine Dell's success over the next 2-3 years.

As I read through Dell's financial records, it becomes obvious that the company is significantly impacted by the transition from desktop machines to laptops, margin pressure, a shift in focus from consumers to businesses, and a shift in focus from a US-based business to a Global-based business. While the blogosphere focuses on customer service problems and a lack of authenticity exhibited by the company, it is clear that Dell has much bigger fish to fry. Dell has to successfully manage four transitions, all happening simultaneously, in order to be successful in the long term. It will be interesting to see how well Dell navigates these tricky waters.

1 comment:

  1. Actually, the insight you have about the shift from desktops to laptops is a great observation. While Dell has laptops, they haven't captialized on the opportunity like they should have (sure, hindsight, but...)

    I also think they've been distracted over the last 3 years trying to grow a bunch of other non-core businesses (media players, etc). Focusing on the core business may have allowed them to innovate and keep their lead. For instance, why aren't they selling a $100 laptop in emerging markets???

    http://www.simplifythis.com

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