Now that Dell
has warned it will be unable to meet even this lackluster financial target, the sense on the Street is that something is broken at the world's No. 1 PC maker.
How apparent this is to Dell, and what the company proposes to do about it, likely will overshadow any of the results contained in the company's earnings report after the market close Thursday.
"Dell needs to wake up," says David Schamens, a managing member at Invictus Funds, which has no position in Dell. "They really need to re-evaluate what has gone wrong and correct it," he says, suggesting everything from better products to a management shake-up.
The company's stock, which closed Wednesday at $23.63, is near its 52-week low and down 19% since the start of the year.
"It used to be sort of a secret that something wasn't right
at Dell about a year ago," says Schamens. "Now it is a very open secret."
Instead of earning between 36 cents and 38 cents a share in the first quarter, Dell has stated that it will post EPS of 33 cents. Revenue should come in at $14.2 billion, vs. its previously set range of $14.2 billion to $14.6 billion.
Dell's new sales guidance represents 6% revenue growth year over year -- a pittance compared with the 16% and 21% growth rates that Dell logged in its first quarter during the past two years.
What's more, it's only slightly higher than the growth that
generated during the quarter, despite that H-P is working from a significantly larger revenue base. Dell reported $55.9 billion last year in annual revenue; H-P posted $86.7 billion.
Whether Dell can return to its high-teens growth rates is anybody's guess. A maturing PC market and Dell's revenue base make some degree of slower growth unavoidable.
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But 6% growth seems well below even the most pessimistic expectations.
So far, Dell's only discernible move to address its problems has been to trot out the price cuts that have served the company so well in the past.
In its preannouncement last week, Dell said it took pricing actions in the second half of the quarter to accelerate revenue growth in the future.
But many analysts and investors believe that price cuts are insufficient and even ineffective in an industry that has evolved and become increasingly competitive.
Future growth will come from the consumer markets and the non-U.S. markets -- areas that traditionally have not been the company's strong points, say analysts. To succeed, Dell may need to do things differently.
In particular, a re-evaluation of deeply ingrained business practices, such as Dell's exclusive use of
processors and its direct-sales model could be in order.
The latter has long been cited as a key to Dell's success, allowing it to keep costs low by avoiding an intermediary.
As the company strives to entice consumers in markets outside of the U.S., such as China, some analysts wonder whether Dell's lack of a retail presence could leave it at a disadvantage.
Meanwhile, Dell's unwillingness to sell PCs and servers that feature
Advanced Micro Devices'
popular line of processors appears increasingly untenable.
Dell's recent acquisition of Alienware, which makes high-end game PCs that use AMD chips, represents a first step toward a dual-source microprocessor strategy.
But many analysts believe that Dell needs to go even further.
One clue that Dell executives may be contemplating more sweeping organizational and strategic changes was the abrupt decision earlier this year to postpone the company's annual analyst day from April until September.
In news reports at the time, Dell officials downplayed the delay, ascribing it more to scheduling than other issues. Given the company's recent struggles, however, it's not inconceivable that Dell's management could be crafting a broad turnaround plan to be unveiled later this year.
So while analysts no doubt will have plenty of pointed questions for Dell executives during Thursday's conference call, detailed answers may have to wait until September.
Even Dell bulls acknowledge that change is in the cards.
American Technology Research analyst Shaw Wu, who rates Dell buy, says the company needs to reset its cost structure. This, he says, will allow the company to once again be the PC industry's low-cost leader.
Dell's past success owed much to its
-like strategy of driving down prices across its network of suppliers, says Wu. "They've lost that edge obviously," he says, "but it doesn't mean they can't get it back."
Wu points to recent moves by Dell to increase its share of low-cost components from Taiwan. On a visit to Taiwan earlier this month, CEO Kevin Rollins told
The Wall Street Journal
that the company intended to boost its purchases of Taiwanese notebook-computer parts and other electronic hardware by more than 20% this year.
"I see them going back to their roots," says Wu, whose firm has no banking relationship with Dell.
The cost-restructuring likely will take a few quarters to carry out, Wu believes. And with no real PC-buying catalysts this year, 2006 is likely to be a throwaway year for Dell, he says.
"The stock's probably going to trade sideways near term because it's kind of in limbo," says Wu. "But when you start looking at 2007, and we get better visibility with the
Microsoft Vista launch and new Intel processors -- that's when the stock starts to work."