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11/16/2005
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Dell Still Confident After Third-Quarter Stumble

The company's CFO told a supply-chain conference this week that unit shipments are still growing, but Dell is getting less revenue and profit from each sale.

Dell has delivered the opening presentation at Raymond James' annual IT Supply Chain Conference for the past decade, but instead of talking about its heralded supply-chain efficiency and direct sales model, the computer maker this year tackled questions about its disappointing third quarter and potential long-term issues within Dell.

Dell senior vice president and CFO Jim Schneider kicked off the conference Tuesday by admitting up front that the company was not pleased with its most recent quarter.

"We were obviously a little disappointed with the revenue we turned in," Schneider said. The quarter, he said, was dragged down by weak sales in the United States and United Kingdom. Schneider said the problem is that every computer maker, Dell included, is selling hardware at a lower price and making less margins.

"It's been a relatively robust unit market [for PCs]," Schneider said, "but overall revenue for the industry isn't any better and it may even be a little worse."

Thus, Dell's unit shipments are still growing, but the company is getting less revenue and profit from each sales. Oddly enough, Schneider said Dell "consciously backed off," pushing its low-priced products that generated meager profits. As a result, Dell's selling points rose from the second quarter to the third quarter this year. That said, Schneider said it may take Dell a couple of quarters to find the right balance between unit, price and profit.

"We want income growth that's similar to revenue growth," he said.

Schneider added that Dell's price advantage is not as formidable as it once was as some competitors have improved their cost structure and lowered their hardware prices to be more competitive against Dell.

"We're still very cost-advantaged, but I'd say it's narrowed somewhat," Schneider said, while adding that Dell still retains its low-price lead.

Nevertheless, Dell still has challenges with some of its businesses, including consumer electronics and printing. Dell's new consumer-electronics business has struggled, while the company's printing business has generated solid revenue but remains largely unprofitable. Dell also has a weaker presence overseas than most of its competitors.

"We have less of an international business than we'd like," Schneider said.

But perhaps most pressing for Dell are concerns that its vaunted customer service and support has declined in quality recently. While Schneider said Dell is "working on some issues," he brushed off analysts and surveys that suggest customer satisfaction has dropped significantly this year, arguing that Dell's own customer surveys indicate the company is still a leader in customer service. As for future growth, Schneider said Dell remains confident but that expecting previous growth rates in today's economic environment may be unreasonable.

In a recent Raymond James' report, analysts Robert Anastasi and Brian Alexander wrote that Dell will continue to grow despite its recent third-quarter stumble but that challenges remain for the company.

"We still believe Dell will grow faster than the market in each segment," the report stated. "However, its premium, especially in PCs, should decrease. This is the segment in which we believe Dell's growth premium is at risk the most."

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