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Dell: 'We'll cut prices and ... er, cut prices'

Double-digit profit drop prompts overhaul

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Following one of its worst quarters in memory, Dell has vowed to enact a process of renewal. The company will overhaul its products and customer support services, while at the same time cutting prices in a bid to attract more business in the long-term.

As promised, Dell delivered first quarter results well below the company's typical standards. Revenue rose just six per cent to $14.2bn, while profits fell a dramatic 18 per cent to $762m. Dell's earnings per share figure dipped 11 per cent to 33 cents.

Dell was hardest hit with a three per cent drop in PC sales and waning server sales. Its notebook, storage, services and peripheral sales all increased by double-digits.

In an uncharacteristic move, Dell executives admitted a wide variety of mistakes over the past few months, including pricing products too high and failing to compete well against major rivals.

"The competitive environment has changed," CEO Kevin Rollins said. "Some competitors have gotten stronger."

Dell also tacitly admitted an over reliance on partner Intel by announcing that it will now use AMD's processors in its server line by year. The switch was reported first by The Register earlier in the day.

"There have been some holes in the multi-processor server side that we are going to be filling," chairman Michael Dell said. "We think Opteron can fill a hole there."

In order to counter losses, Dell called for sweeping action that will see it hammer away on the pricing front and improve the "customer experience" via better services and support.

"Over the last year, we tried to achieve both growth and increased levels of profitability, which allowed our competitors to improve their relatively low levels of profitability and accelerate their growth," Rollins said. "We have now taken action to reignite our growth and reassert the unique value of our Direct Model. We are re-establishing our price position, investing in customer sales, service and support, building our product and technology leadership and improving our cost structure and productivity."

HP, one of Dell's main rivals reported healthy results earlier this week.

During the conference call with the Wall Street crowd, analysts pounded away at Dell. A number of the analysts questioned if Dell was going to spark a price war and wondered if that wasn't a short-term answer to a long-term problem. In addition, they questioned whether there was any real meat to Dell's pledge to revamp its product and support efforts.

Chairman Dell countered by saying, "We're focused on reestablishing the value proposition of our model." He added that the company has "definitive plans in place" to improve the areas in question.

Dell has just about the most spectacular long-term track record - particularly from a stock performance perspective - of any major technology company. And, to be fair, the analysts seemed more focused on short-term results than management.

The larger questions remain though as to whether or not Dell can push international sales to the levels enjoyed by IBM and HP. Dell's dependence on US customers limits some of its growth opportunities. In addition, Dell relies heavily on low-margin desktop PC sales, which are in a depressed state.

This mess has put a real damper on Dell's much publicised plans to grow to an $80bn company. Just nine months ago, few questioned whether or not Dell would hit that figure in short, predictable order. But when all you have is the "Dell model" to rely on and the "Dell model" sprouts a flaw, it's tough to rework your business and get it growing again.

Without strong R&D, broad services, intense customer loyalty or hooks such as an operating system or software stack to leverage, Dell can only keep selling direct with no frills and hope that's what the market wants. ®

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