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11/3/2005
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Analyst: Despite Dell's Lowered Financial Expectations, Outlook Remains Strong

As the technology market grows at a slower pace, companies that improve their operations and supply chain will dominate the market; an AMR analyst says that Dell is better positioned than other companies to do this.

Don't think optimistic times are over for the No.1 PC company, said AMR Research Inc. on Thursday. Dell Inc. will continue to lead the competition despite this week's earning warning, the research firm suggests.

As the technology market continues to mature and grow at a slower pace, companies that improve their operations and supply chain will dominate the market. Dell is better positioned than other companies in the markets they serve. "Many companies operate globally and must coordinate with suppliers worldwide," said Tony Friscia, president and CEO at AMR Research. "Dell is as close to Wal-Mart in how it functions as any technology company."

Dell on Monday warned its third-quarter earnings would miss profit forecasts. The electronics maker trimmed its sales and income targets for the current quarter, saying sales in the United States and Britain were weak. It also intends to take a third-quarter charge of $450 million to restructure its consumer unit and replace some faulty PC circuits.

In August, the company forecast a profit of 39 cents per share to 41 cents per share, and has revised that to 25 cents per share. Analysts surveyed by Thomson Financial had expected 40 cents per share. Dell added that sales would come in at about $13.9 billion, below its previous forecast range of $14.1 billion to $14.5 billion and below analysts' estimate of $14.3 billion. It's the second sequential quarter that Dell's sales would take a hit.

Dell has expanded into new markets from flat-panel monitors to point of sale devices for retail stores, but two thirds of its sales still come from PCs. Dell operates in commodity markets from PCs to cameras. Managing these types of businesses well hangs on how well inventory is managed.

It's dell's responsiveness to customer demand that makes Dell unique. Their forecast accuracy is among the highest with only maintaining between four to five days worth of inventory. "I don't see how they lose that advantage overnight," Friscia said. AMR's research shows that a 1% improvement in forecast accuracy drives a 2% improvement in order performance, and that in turn links with a 5% overall revenue cost advantage.

Dell expanded from 22 product families in 1998 to 175 in 2005. Most of these products have lifecycles that are shorter than 18 months. Their build-to-order supply chain business model lets them get new product to market in less than a week. If Dell obsoletes a product they can remove it from market much more quickly, whereas it could take weeks for a typical company that has product on shelves at Circuit City, Best Buy and other electronics stores.

Friscia said that by focusing on supply-demand balancing while introducing new products, Dell is able to transition models and component supplies with virtually no excess and obsolete inventory, less than 5 percent.

Dell reports earnings on Nov. 10.

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