Dell Computer Corp CEO Michael Dell introduced two new products this week that are aimed at restoring profit growth at the second-largest personal computer maker. Neither was a PC.
Dell unveiled a projector that displays movies almost five times bigger than the largest TVs and a new line of the company's most-popular server, a computer that runs PC networks. He said in April he wants to increase revenue from products other than PCs to 50 percent from 30 percent of sales.
Many investors said they support Dell's strategy because profit stopped growing in 2001 even as the company stole PC customers from rivals by lowering prices. Selling printers, servers and network switches offers wider profit margins, provided Dell can compete against giants such as Cisco Systems Inc and Sun Microsystems Inc, the investors said.
"PC growth is more moderate, and they can grow faster in other areas," said Graham Tanaka, president of Tanaka Capital Management, which owns Dell shares and manages US$160 million. "It makes sense. They can transport their model to other products."
The Austin, Texas-based company is expected to report profit of US$0.16 a share on sales of US$7.84 billion in the first quarter ended May 3, the average estimates of analysts surveyed by Thomson First Call. Dell had net income of US$462 million, or 17 cents, on sales of US$8.03 billion in the year-earlier period.
Michael Dell, 37, was paid US$2.6 million in salary and bonus and was granted 1.25 million stock options in fiscal 2001. Dell, the company's biggest shareholder, owns a stake valued at US$9.68 billion. Dell declined to comment for this story, spokesman Mike Maher said.
The company's sales fell last year for the first time since Michael Dell founded the company in the mid 1980s and used efficient manufacturing, phone and Internet sales and low prices to boost sales by 55 percent a year in the 1990s.
Dell shares rose US$0.80 yesterday to US$27.70. Since August 2000, as PC demand began to fall, they have declined 33 percent, less of a drop than rival Gateway Inc's 90 percent plunge and Hewlett-Packard Co's tumble of 64 percent.
Dell had the largest share of the PC market, 14 percent, in the first quarter, prior to H-Pa completing its acquisition of Compaq Computer Corp this month, according to market researcher Dataquest Inc. The combination of Hewlett- Packard and Compaq had a 17 percent share last quarter, Dataquest said. Dell President Kevin Rollins said in April the company would regain the top spot within two quarters.
Worldwide PC shipments fell for the first time last year since 1985. Last month, Gateway projected 4 percent yearly PC hardware and software sales growth until 2005. Many investors said they don't expect the industry to return to growing 15 percent a year, as happened in the 1990s.
"Everyone's come to the realization that we've come to maturation" in the PC market, said Steven Salopek, who helps manage US$148 billion at Banc One Investment Advisors, including 8.7 million Dell shares. "It's the next logical move to address other markets."
That has eaten into Dell's earnings strength.
The company's gross margin, a measure of profitability after paying production costs, fell to 18 percent in the fourth quarter ended in February from a four-year high of 23 percent in the second quarter of fiscal 1999, Bloomberg data shows.
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