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Flash Player 9 or higher is required to view the chart Click here to download Flash Player now See all Bulls Reasons Bulls: Reasons To Buy Fiscal first quarter earnings higher than expected 100% agree Fiscal first quarter earnings higher than expected After nearly two years of decline, Dell's earnings are finally on the rise again, with first quarter earnings of 2008 higher than Wall Street estimates. Driving this profit climb include the fact that server sales rose 21% and laptop shipments 43% since Michael Dell took over the... read more View or Edit Reason 7 votes 100% agree Non-PC consumer electronics a big opportunity 80% agree Non-PC consumer electronics a big opportunity Dell is expanding into the non-PC segment, which is showing both higher growth rates and higher margins than the PC market. The company is increasing its offerings of servers, peripherals, services, etc., in an attempt to capture share in this budding market segment. View or Edit Reason 5 votes 80% agree Reining in expenses and buy back deal 75% agree Reining in expenses and buy back deal Dell’s total operating expenses were $15.2 billion for the quarter ended Feb. 1, while total revenue clocked in at almost $16 billion, leaving less than $800 million in operating income. The company wants to reduce costs by $3 billion by 2011. "I believe we have begun the journey... read more View or Edit Reason 4 votes 75% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell Intensely competitive, low-margin business 80% agree Intensely competitive, low-margin business Intense competition in Dell’s PC markets can put pressure on both profits and prices. If Dell’s prices are too high relative to the competition, the company stands to lose market share to its competitors. This forces Dell to maintain a balance between per-unit profit margins and market share. View or Edit Reason 5 votes 80% agree Domesting PC sales are 65% of revenue 100% agree Domesting PC sales are 65% of revenue Sluggish demand growth in the domestic PC market can negatively impact Dell’s revenues, as 65% of all sales come from the Americas. View or Edit Reason 2 votes 100% agree Outsourcing means less room to cut costs 50% agree Outsourcing means less room to cut costs As Dell outsources more components to third parties, thereby increasing its dependence on technology partners, Dell loses some of its control over prices and the overall supply chain. View or Edit Reason 2 votes 50% agree Add your own Bears Reason Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Dell (NASDAQ: DELL) is a global vendor of personal computers and is one of the largest companies in America, employing over 65,000 people and earning revenues of $61.1 billion in 2007. In addition to both desktop and notebook PCs, Dell sells peripherals, software, accessories, corporate servers and storage systems, and customer support services.

Traditionally, Dell had been concentrated in the domestic PC market. In 2006-2007 the domestic PC market was saddled by sluggish PC sales growth and intense competition. Beginning in 2007, Dell began forming partnerships with large retailers across the U.S., Europe and Asia. Notable among these are Wal-Mart Stores, Best Buy (BBY), Costco Wholesale (COST), and Suning and Gome, China's largest electronics store. These partnerships represent a drastic departure from Dell's previous strategy which purposely excluded any relationships with retailers. As a result, in addition to its traditional mail order distribution system, Dell now has nearly 13,000 retail locations worldwide.^[1] Throughout 2008, international sales continued growing and accounted for approximately half of Dell's revenues.^[2]

As corporations upgrade their computer systems to meet the compatibility requirements of Microsoft’s Windows Vista operating system, Dell’s higher-margin commercial business stands to benefit from increased demand. Dell is also responding to somewhat unimpressive PC sales growth by expanding their offerings of non-PC electronics and increasing their presence in developing countries such as India and China.

[edit] Business Financials

Dell offers a variety of products and services. Among its offerings are a wide array of desktop and notebook computers, peripherals and software, technical support services, and corporate servers and storage systems. In addition, Dell’s subsidiary Alienware offers desktops, notebooks, and peripherals specialized for high-end video and audio editing and gaming.

• PCs (60% of revenue)

Dell produces several lines of consumer and commercial PC systems, including both desktop and notebook models. Overall, Dell holds about 14% of the worldwide PC market. Within the PC segment, desktops contributed 32% of Dell’s Fiscal 2008 revenue, and notebooks accounted for 28%.^[3]

• Software, Peripherals, and Accessories (16% of revenue)

Dell sells various software programs with its PC systems, such as productivity software, security programs, and games. Dell also sells a number of computer-related peripherals, including LCD monitors, printers, input and storage devices, etc. Aside from PC-related items, Dell sells various accessories and electronic devices, such as LCD televisions, digital cameras, and MP3 players. These software and peripherals accounted for 16% of Dell’s Fiscal 2008 revenue.^[4]

• Servers and Storage (15% of revenue)

For its corporate customers, Dell provides both servers and storage systems. Dell continues to aggressively pursue this market, bringing 9 new enterprise servers to corporate consumers in January of 2008. Dell also sells customized servers and enterprise systems designed to meet the specific needs of certain customers. Servers and storage accounted for 15% of Dell's Fiscal 2008 revenue.^[5]

• Technical Support and Services (9% of revenue)

Dell also sells technical support services for its products, providing customers with assistance after they purchase their systems. Typically, services such as these provide high margins relative to Dell’s other business segments. Typically, services such as these provide high margins relative to Dell's other business segments. Though services accounted for only 9% of total sales, they contributed around 35% to Dell's 2006 gross profits Services accounted for 9% of total revenue for the Fiscal year 2008.^[6]

DELL Annual Report 2008^[7]

In Fiscal 2008, revenue increased 6% year-over-year to $61.1 billion, with unit shipments up 5% year-over-year. Revenue grew across all regions: Asia Pacific-Japan (“APJ”) grew 15%; Europe, Middle East, and Africa (“EMEA”) increased 12%; and the Americas grew 3%.^[8] Revenue outside the U.S. represented approximately 47% of Fiscal 2008 net revenue, compared to approximately 44% in the prior year. Outside the U.S., Dell produced 14% year-over-year revenue growth for Fiscal 2008, though unit growth was below the overall unit growth rate of the international PC market.^[9]

DELL Annual Report 2008^[10]

DELL Annual Report 2008^[11]

[edit] Third Quarter Earnings

On Thursday, November 20, 2008 Dell posted their Q3 earnings, beating Reuters' expectations of $0.31 by 6 cents, to post a revenue of $15.2 billion, despite a slowing global industry demand for the month of October. Dell says that it will continue to focus on improving competitiveness, lowering costs and improving its mix of products and services to optimize liquidity, profitability and growth.^[12]

[edit] Trends and Forces

[edit] Upgrade Cycles force companies to replace their computer systems

As technology evolves, companies often upgrade or replace their computer systems to take advantage of new technologies, an occurrence known as the upgrade cycle. Technological innovations can trigger the upgrade cycle and increase demand for Dell’s products, while a lack of new developments can discourage companies from upgrading their computer systems. This cycle occurs primarily in the commercial market, where companies tend to replace all their computers at once. This can significantly impact Dell’s revenues, as 51% of Dell's revenue is to business in the Americas (not including businesses in Europe and Asia).^[13]

The release of a product like Microsoft’s Windows Vista operating system could trigger an upgrade cycle in Dell’s commercial segment. Many older computer systems do not meet Vista’s compatibility requirements, encouraging companies to upgrade their systems to take advantage of Vista’s new features. This potentially increased demand in the higher-margin commercial segments could positively impact Dell’s total sales.

[edit] Dell is expanding its global presence through deals with various retailers

Established in 1984, Dell is a relative newcomer in the computer industry, especially when compared to long-established companies like IBM and HP. As such, Dell still has a lot of room for expansion in certain areas, especially the non-PC segment and international markets. These segments have been showing higher growth potential than the domestic PC market in which Dell has historically been concentrated.

On that note, Dell has shown a major interest in expanding their global exposure. Dell has signed a deal with Wal--Mart Stores (WMT) to sell Dell desktops and notebooks in Brazil and Mexico.^[14] Dell has also signed a deal with Gome Group, which is the largest electronics retailer in China.^[15] Deals with retailers in Japan and UK have also been inked.^[16] This is a major shift from Dell's previous model of selling PCs over the internet and phone. Opening up to retailers such as Wal-Mart and Gome adds a massive distribution network for Dell that has the potential for a major international turnaround.

[edit] Developing countries boost computer sales

Dell continues to pursue international sales through a variety of means. In addition to distribution agreements with large retailers, Dell has developed a number of products specifically targeted at emerging markets. The best example of this is the Dell 500 notebook, a low cost laptop designed to be affordable for a large phase of the population of developing countries. Such initiatives have proven successful for Dell; unit sales for emerging markets grew 62% during the first quarter of 2008. With revenue in India and China growing 52% and 30%, respectively, for the same period. Despite this stellar performance there is still much room for growth, since only 5.1% of Indians and 9% of Chinese have computers, compared to 75% of Americans.^[17] Furthermore, 85% of the world's population lives in developing markets.^[18]

[edit] Dell has a variety of non-PC products with room for growth

Within Dell’s portfolio of offerings, non-PC products and services are showing larger growth potential than the company’s PC segment, which currently accounts for 60% of sales. Dell is responding to this increased demand in the non-PC segment, expanding its line of servers, peripherals and accessories, and customer support services. These account for a smaller percentage of Dell’s revenue, leaving room for continued growth. In addition, margins on these goods and services are generally higher, especially for technical support services. The higher profitability and increased demand in the non-PC segment could bolster Dell’s earnings significantly if the company continues to improve its offerings in the segment.

Dell has agreed to acquire EqualLogic, a data networking systems company, for $1.4 billion.^[19] This acquisition is an attempt to enhance Dell's offering in data storage, which only accounted for 4% of sales in Fiscal 2008.^[20] The main customer demographic is expected to be medium sized companies that cannot afford the more expensive data storage systems.

[edit] Outsourcing to increase profit takes power from Dell

The PC market has become intensely competitive, especially in the United States. Dell must keep its prices competitive or risk losing business to competitors, putting pressure on Dell to cut production costs wherever possible. Following industry trends, Dell has begun outsourcing more components to third parties in order to lower its costs of production. Unlike other leading PC manufacturers, such as Hewlett-Packard Company (HPQ) or Apple (AAPL), Dell still assembles its own final products.^[21] In order to try and close the resultant gap in production costs, especially for highly demanded notebooks, Dell announced plans in September 2008 to sell its factories worldwide to various contract producers.^[22]

The purpose of this outsourcing is to minimize production costs, increasing profit margins and allowing the company to reduce prices. On the other hand, Dell’s increasing reliance on its technology partners can decrease its control over the supply chain as a whole. As more components are outsourced to third parties, Dell loses some of its control over both prices and the overall production process.

[edit] A suffering economy results in declining PC sales and a rise in Netbook sales

PC sales and prices are declining. As it stands, IDC already expects PC sales to be down 5.3 pct in 2009 as consumers search for cheaper units in a bad economy.^[23] Netbooks are a new type of portable computer, that are cheap, light weight, and easy to use. In Q3 2008, shipments of netbooks grew 160%, overtaking iPhone sales by 900,000 units.^{[24] [25]} Consequently, the sales of netbooks are driving notebook prices down. The average selling price for a portable computer is $1,106, and IDC predicts that this will drop 8% to $1,018 in 2008, and an additional 12% next year, partly because of netbooks.^[26] A shift to netbooks would be detrimental to Dell, who only has a 2.8% market share in the shipments of netbooks, as compared to a 32% market share in the combined shipment of netbooks and notebooks.^[27]

[edit] Competition

Dell’s competition varies in its different segments. However, its largest competitors overall are Hewlett-Packard, International Business Machines, and Lenovo Group (LNVGY). Hewlett-Packard's recent acquisition of Electronic Data Systems (EDS) will create difficulties for Dell, as previously Dell had an agreement to sell its PCs and other hardware through EDS. Since HPQ will likely be unwilling to market Dell's products through its subsidiary this buyout will cause a loss of sales for Dell.

[edit] PCs

Dell is the second-largest vendor of PCs worldwide with a 15.6% market share, coming second to Hewlett-Packard who commands an 18.1% market share.^[28] Dell’s other significant competitors in the PC market include Lenovo Group (LNVGY), Acer, Toshiba, and Apple. The desktop market is highly fragmented, with the top five companies accounting for only 55.2% of the global desktop market share.^[29] This is due to the large number of small, low-cost manufacturers, which hold around 44.8% of the desktop market.^[30] Below is the Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2Q08 (Thousands of Units) by Gartner.

[edit] Notebooks

In notebooks, the top nine companies hold about 85.5% of the global market, and the segment has shown strong growth, attributable to sales in developed countries and the proliferation of wireless access.^[31] To compete with Apple's many small computing products, in August 2008 Dell began selling a series of Ultra-portable laptops that weigh about 2 pounds and have 19 hours of battery life.^[32] Dell also has a major initiative to tackle the designer 13-inch notebook market, specifically through its Adamo notebook, which is an ultraportable and will be marketed as the "world's thinnest laptop" in order to compete with Apple's MacBook Air.^[33] Below is a chart of Notebook PC shipments by brand in 1Q08 (millions units) from Digitimes.^[34]

 Dell

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Company	Data From	Desktop Sales	Laptop Sales	Net Income
Dell (DELL)	2007	19.8B[35]	1.23K[35]	$2.58B[36]
Toshiba (TOSBF)	2007	Add	Add	$1.16B[37]

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[edit] Servers

Dell is a relative newcomer to the server market. In the server market, Dell is behind HP, IBM, and Sun Microsystems, accounting for just 12.3% of revenues in the server market in the first quarter of 2008.^[38]Dell’s server offerings are aimed at the low-end market segment, which includes servers that cost less than $25,000. This segment has shown strong growth as quality in the segment increases, resulting in declining demand for high-end servers. Below is a chart of Top 5 Corporate Family, Worldwide Server Systems Factory Revenue, First Quarter of 2008 (Revenues are in Millions) from IDC.^[39]

[edit] References

1. ↑ Dell shares jump on upgrade – July 31, 2008
2. ↑ Investopedia: Dell Sacrifices Profit for Market Share
3. ↑ DELL Annual Report 2008 - Item 6 - Page 28
4. ↑ DELL Annual Report 2008 - Item 6 - Page 28
5. ↑ DELL Annual Report 2008 - Item 6 - Page 29
6. ↑ DELL Annual Report 2008 - Item 6 - Page 29
7. ↑ DELL Annual Report 2008 - Item 6 - Page 28
8. ↑ DELL Annual Report 2008 – Item 7 – Page 23
9. ↑ DELL Annual Report 2008 – Item 7 – Page 23
10. ↑ DELL Annual Report 2008 - Item 7 - Page 38
11. ↑ DELL Annual Report 2008 - Item 6 - Page 25
12. ↑ Dell beats earnings expectations (Reuters) - November 20, 2008
13. ↑ DELL Annual Report 2008 - Item 6 - Page 25
14. ↑ Dell to Sell PCs in Brazil, Mexico Through Wal-Mart Stores September 28, 2007
15. ↑ GOME And Get Your Dell September 24, 2007
16. ↑ Dell expands Japanese retail deal July 30, 2007
17. ↑ Seekingalpha: Dell Targets India
18. ↑ DELL Annual Report 2008 - Item 6 - Page 23
19. ↑ Dell Acquires EqualLogic For $1.4 Billion November 5, 2007
20. ↑ DELL Annual Report 2008 - Item 7 - Page 27
21. ↑ WSJ: Dell Plans to Sell Factories in Effort to Cut Costs
22. ↑ WSJ: Dell Plans to Sell Factories in Effort to Cut Costs
23. ↑ PC sales seen down 5.3 pct in 2009 – December 3, 2008
24. ↑ Netbook Sales Overtake iPhone Sales December 10, 2008
25. ↑ Acer leads netbook market while Apple loses market share - December, 2008
26. ↑ Netbook Sales May Be Cutting Demand For Laptop PCs - November 26, 2008
27. ↑ Acer leads netbook market while Apple loses market share - December, 2008
28. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
29. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
30. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
31. ↑ Notebook computer market share 1Q08
32. ↑ Dell launches new ultra-portable laptops August 8, 2008
33. ↑ Dell Adamo "world's thinnest" notebook? - December 19, 2008
34. ↑ notebook computer market share 1Q08
35. ↑ ^{35.0 35.1} Dell,2007,10-K,Item-7,Page-42
36. ↑ Dell,2007,10-K,Item-8,Page-62
37. ↑ Toshiba, AR-2007, Finalcila Review
38. ↑ Worldwide Server Market Shows Resiliency with Solid First Quarter Results, According to IDC May 27, 2008
39. ↑ Worldwide Server Market Shows Resiliency with Solid First Quarter Results, According to IDC May 27, 2008