Skip to main content

TechWeek: Dell's Ploy

The PC giant looks to printing and high-end products as its stock sags.


(DELL) - Get Free Report

investors, still gasping from their darling's southward trajectory this year, got a bit of relief this week as the stock made a U-turn and gained about 2% as techs rallied. Many are hoping that Dell can parlay its play in the printing business into more gains on Wall Street -- but Goldman Sachs hardware maven Laura Conigliaro says not just yet.

As we all know, consumables, whether razor blades or ink jet cartridges, deliver repetitive sales and higher margins, so analysts figure that as Dell sells more printer supplies, it will see a substantial upside. Conigliaro says that printer margins for the giant PC maker should move from break-even to a more substantial mid-4% range. "While notable, this is still not enough to move the needle in a meaningful way as far as earnings -- and therefore stock performance -- is concerned," she said in a recent note to clients. (Goldman has an investment-banking relationship with Dell.)

Dell, meanwhile, continues to get lots of bad press in an area that was once one of its biggest strengths: consumer satisfaction. Media critic and tech watcher Jeff Jarvis started the public pillorying in his blog in June, recounting an ugly series of encounters with Dell support as he tried to get his new computer to run. Now


is piling on, running an anecdote-filled, 1,600-word story that even steers readers to an "I hate Dell" Web site.

Dell could well argue that anecdotes are nothing more than, well, anecdotes, and the company points to a 35% increase in consumer satisfaction as measured by its monthly survey of 50,000 customers. But customer-satisfaction stats may not wash with consumers.

In an earlier generation, people used to say, "No one ever got fired for buying from IBM." There's no equivalent aphorism regarding Dell, but years of flattering coverage in the consumer and trade press -- not to mention favorable word-of-mouth -- made Dell seem like the safe buy for your family. (Dell's business computers are a separate story.)

Earlier this week, Dell announced the launch of a new, high-end line of notebook and desktop computers called XPS. As you'd expect, the new line has many improvements to what we used to call "speeds and feeds." More interesting, though, is this: XPS customers are promised hold times that are half as long as those the

hoi polloi

have to suffer through, as well as access to specially trained technicians.

Good deal for the high-end buyer, but what about the rest of the customers? "We are focused on reducing hold times for all of our customers," says Jennifer Davis, a Dell spokeswoman. Dell, she said, has recently opened four new call centers, including one in India and another in El Salvador, and is ratcheting up the size of its support staff.

Dell's support operation was designed along the classic "break-fix" model -- as in, "My hard drive failed; fix it." But now that the home PC is the centerpiece of an array of digital devices and related software, customer help has become much more complex. Davis said that 30% to 40% of the calls Dell support centers now receive are for issues that aren't covered by warranty. The company expects to roll out in November programs that will give customers more ways to get support for non-hardware-related issues.

Those measures better help. Dell's high-volume business model didn't work so well in the last quarter, when the company sold a record number of PCs, but at prices too low to bolster profitability. A buyers' strike would not be pretty.

Leaping Linux

Software soars, or at least

Red Hat


did. In fact the Linux vendor did so well following earnings --

a one-day gain of nearly 30% -- that it brought back memories of dot-com exuberance.

Was the huge gain all that irrational? "Well-deserved," answers Gus Zinn, an analyst with Waddell & Reed. And Chuck Jones of Atlantic Trust Stein Roe said the stronger-than-expected cash flow -- a 48% year-over-year increase to $45.8 million -- was the surprise that caught the attention of some investors, along with very solid earnings and guidance.

A strong showing by one company can be good news for the competition when it shows that the entire market is heating up. But it doesn't look like No. 2 Linux provider



can take much comfort in Red Hat's numbers.

Prudential analyst Brent Thill points out that Red Hat's subscriptions were up 49% in the quarter. More significantly, though, on a trailing four-quarter basis, the company has sold 712,000 Linux subscriptions compared with just 89,000 for Novell. And that gives Red Hat a "commanding" 89% market share. (Prudential does not have an investment-banking relationship with Red Hat.)

BEA Systems


didn't have such a great week either. Its annual customer convention generated very little buzz, and the analysts who published notes on the company seemed unimpressed. "Overall, we did not see anything that was fundamentally new that could help stimulate license revenue growth in the near term," wrote Piper Jaffray analyst David Rudow.

Kash Rangan of Merrill Lynch was a little more positive, particularly about the company's prospects in telecommunications, but he still told clients: "We remain on the sidelines until we see evidence thatone or more of these growth initiatives will be catalysts for sustained P/E expansion."

Merrill Lynch has an investment-banking relationship with BEA; Piper Jaffray does not.