Dell and Rollins Defend Dell Inc.'s Business Model

Includes: DELL, HPQ
by: SA Eli Hoffmann

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

Beyond the Battery Mess by Jay Palmer

Highlighted companies: Dell Inc. (NASDAQ:DELL)
Summary: Interview with Dell founder/chairman Michael Dell and CEO Kevin Rollins. Key claims from Dell and Rollins: No problem with the company's fundamental business model and market position as Dell is still the most profitable company in the PC industry. US PC sales are dominated by corporate demand, and Dell's direct model works well for that. (Corporations don't purchase PCs from retail stores.) Dell Inc. made a mistake cutting spending on customer service, but that's now being put right and corporate satisfaction with Dell, reflected in reorder rates, is still high. Dell is investing in design, but corporations don't buy PCs for their design. Revenue growth in Asia is strong, and Dell is taking share in Japan and China in particular. Dell and Rollins refused to predict improvements in profitability as the company is no longer giving guidance, but did say that they expect the corrective actions they are taking to lead to medium term margin improvement. Some poignant quotes: "We are making the investments we believe are needed, but, much as we would like these to show a return within 90 days, the pay back will take longer." "We are now reinvesting in service and it has already started to improve markedly." "The batteries were a quality problem not at Dell but at our supplier [Sony (NYSE:SNE)]... A point you might want to consider is that we used only 18% of Sony's battery output for the period. Where did the rest go?" "It is fair to argue that (computer) prices did go down too far too fast, at least in relation to costs." "I don't think that corporate satisfaction has declined anywhere near what we are talking about on the consumer side." Dell also brushed-off talk of tension between him and Rollins, and denied rumors that he is considering taking back the CEO job. Dell pointed out that he has recently become a buyer of the stock. (He purchased $70 million of Dell shares in May). The company has said it will buy back about $1 billion worth of shares this quarter.
Quick comment: Some may view the interview as defensive (the questions were reasonable but aggressive), but the article may succeed in refocusing investors on Dell's entrenched position in the US corporate market. For other recent commentary on Dell's stock, see Trading Places: HP, Dell Reverse Rolls from last week's Barron's Summary, in which Mark Veverka contrasts Dell's recent blunders with HP's (NYSE:HPQ) new sense of purpose, Paul Kedrosky's Mr. Market's Dell Mood-Swing Thing which argues that the market has overreacted to Dell and HP's performance, and Paul DeMartino's more bearish With Dell, the Herd Instinct May Be Right. Interesting also to contrast the upbeat tone of HP CEO Mark Hurd's comments in his fiscal 3Q conference call (see transcript) with the defensive tenor of Dell and Rollins' comments in this week's interview.

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