In our earlier post 'Is it the beggining of an end for Dell?', during May 2006, we had thrown light on the various challenges faced by Dell Inc. The latest quarter (second quarter of FY07) results indicate that the company has no respite from its woes, even as it struggled to gain traction against its competitors - HP, Lenovo and Acer. Despite its aggressive pricing strategies, the company's revenue grew a modest 5% to $14.1 billion year-over-year, while net profits plummeted 51% to $502 million. In contrast, the net profits of its key competitor HP grew 89% to $1.38 billion during the same period. Dell's modest revenue growth is attributed to the lower single digit growth of PCs in the US market, where it sells bulk of its PCs.
To compound its woes, two days ago the company recalled 4.1 million notebook computer batteries (manufactured by Sony) after they found out a flaw in its batteries. The safety recall, said to be the largest in the history of consumer electronics industry, is to cost over $300 million (Sony will be sharing the costs). Adding to the woes, the U.S. Securities and Exchange Commission (S.E.C) , the capital markets watch dog, is currently doing a formal inquiry on the Dell's accounting practices.
To ward off these challenges, the management indicated a series of intiatives. These include increasing investments in customer support and services by $50 million to $150 million for the year, cost-cutting initiatives, and better pricing management (perhaps another round of price cuts is in the offing). In addition, Dell also appears to have realized that it cannot ignore AMD for long, as it started offering its PCs with AMD chips unlike in the past. Nonetheless, the effectiveness of these measures can be seen only over a period of time.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
