Dell: Sure, we've got PCs, but try the printers

Dell may have tried to shift attention to its other businesses at its analyst meeting this week, but PCs are still the heart of the company, analysts said.

A casual observer of the IT industry who stumbled upon Dell's analyst meeting in Austin, Texas, last week while looking for a blues bar on Sixth Street might have emerged from the ballroom of The Four Seasons Hotel slightly confused about the nature of the company.

The worldwide leader in PC market share spent very little time talking to financial analysts about its performance in the core business that accounted for about two-thirds of its revenue during its last fiscal year.

In fact, after a question-and-answer session with Chief Executive Officer Kevin Rollins, company spokesman T.R. Reid informed journalists that reporters had an "obligation" to focus on the other parts of Dell's business that were outlined during the two-day event, such as printing and services. While that exhortation prompted some curious looks, Dell's message was clearly designed to reassure the financial community that even if the PC market stagnates, Dell will continue to exceed expectations for quarterly growth, analysts said Friday.

Over the past few years, the company has delighted the financial community by improving revenue and net income by about 20 percent each quarter, compared to the previous year's quarter. With PC shipment growth expected to slow to 8 or 9 percent over the next two years, and revenue growth in the category expected to be even weaker, Wall Street analysts are concerned that Dell is about to hit the inevitable slowdown in growth that befalls mature companies.

To dispel that notion, Dell executives pointed to several different markets that will allow the company to increase its yearly revenue to US$80 billion by 2008 or 2009. The company recorded $49.2 billion in yearly revenue during its fiscal year 2005, which ended Jan. 28, and expects to post around $60 billion in revenue during the current fiscal year.

For example, Dell cited the printing and imaging market, which the company thinks will be worth $105 billion in 2005. But Dell did not discuss how closely shipments of printers are tied to shipments of PCs, said Stephen Baker, director of industry analysis with NPD Techworld. Dell often gives away free printers with purchases of Dimension desktop systems, or discounts laser printers for business customers of Dell's PCs, he said.

This makes sense, because the revenue stream generated by replacement ink or toner cartridges for the printer quickly offsets the cost of giving away the printer, Baker said. But the PC business is what drives that revenue stream, not the printer itself, he said.

With slower PC growth expected this year, Dell might have been trying to soften the upcoming blow of relatively poor market share results during the current quarter, said Roger Kay, vice president of client computing for IDC.

Over the last few years, Dell has made significant gains in PC market share at Hewlett-Packard's expense during the year's first quarter, while HP chipped away at that advantage over the remainder of the year, Kay said. Although Dell reaffirmed its guidance for the first quarter, Rollins said the PC business had been a little weaker than the company had expected.

If the company doesn't post as strong a gain during the first quarter, it might not be able to increase PC market share over HP this year and therefore it would only be able to grow as fast as the entire market, Kay said. IDC and Gartner will report their PC market share estimates in two weeks.

The financial community tends to overreact to bad news, Kay said. Should Dell fail to post those market share gains, the company could point to its messages during the past week and remind analysts that the fluctuations of the PC market will have less of an effect on Dell's overall business going forward, he said.

Dell is at a turning point in its history, Kay said. Dell executives and public relations personnel are trying to manage the company's transition from a U.S. PC vendor to a global enterprise IT vendor with the breadth of its rivals, like HP and IBM, he said.

"They've been saying this message for a long time, but they've cranked it up," Kay said.

Dell believes it is in the best financial shape of its life, and few analysts think the company would set a target for $80 billion in yearly revenue if it wasn't very confident in its plan for reaching that goal. But financial analysts plan to wait and see if Dell can pull off this transition without significant contributions from its PC business.

"We think Dell can sustain about 16 percent revenue growth the next few years. But dependence on PCs and slowing penetration in key European countries must be monitored," wrote Merrill Lynch & Co. analyst Steven Milunovich in a research note distributed Friday.

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Tom Krazit

IDG News Service
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