Guild Companies

Continued cost cuts and an unexpected increase in sales combined last week to force Dell to revise its earnings projections upwards for the current quarter, which ends November 1, 2002. Last week the leading supplier of computers by volume upped revenue expectations for the quarter by $200 million, to $9.1 billion, citing a 2 percent to 4 percent sales increase it says is underway. If Dell makes those numbers, it will be the fourth time over the last five quarters that Dell has beat expectations.

In August, the Round Rock, Texas, company estimated that its revenues for the third quarter of fiscal 2003 should result in earnings of about 20 cents to 21 cents per share, driven by an expected 5 percent to 6 percent growth rate in sales over the previous quarter, said Dell chief financial officer Jim Schneider during Dell's fall analysts conference last week. "We're actually trending much better than that, with sales up 8 percent or 9 percent," Schneider said. The news of an uptick in sales is not enough to significantly alter Dell's expected earning per growth of 20 cents to 21 cents per share, but did result in a solid pronouncement by Schneider that the company should hit 21 cents on the nose.

Dell launched an aggressive campaign earlier this year to cut costs by $1 billion for fiscal 2003. The company said last week it is on track to achieve that number, adding that the cost cutting could help the company to a record fourth quarter in terms of profit. The company is experiencing good growth in sales of entry-level servers and storage devices and midrange servers, and is starting to ramp up its midrange storage, enterprise and scientific computing, and professional services efforts. Key to all of these initiatives is the belief that customers are looking for affordable, standards-based offerings. Because Dell is good at cutting costs out of producing PCs and servers and is one of the largest producers of these devices (and hence has volume economics on its side), the company is confident that it can double its revenues in a few years to around $60 billion. IBM and Hewlett-Packard are each running at about $85 billion in annual sales for calendar 2002. IBM and HP may stay at that revenue level, if Dell doesn't take it out of their hide to get to that $60 billion level. Dell would be the number three IT supplier in the world at that level, behind IBM and HP.

Dell used the analyst conference to reiterate its support for "standards-based computing," in which companies base their computing infrastructure on servers equipped with Intel-based processors that run Microsoft Windows or Red Hat Linux operating systems.

Vendors of proprietary RISC, Unix, and mainframe designs use the closed-nature of their architectures more to lock customers in than to satisfy their computing requirements, said Michael Dell, founder, chief executive, and chairman of Dell. "Dell of course takes a completely different approach," he said. Dell welcomes the trend toward standardization and commoditization of servers, he said, adding, "We're the only systems vendor to fully embrace this approach."

This led Dell into a discussion of his company's research and development strategy. Dell has been heralded on the one hand for creating an extremely efficient logistics operation, which only has about four days worth of inventory in stock at any one time and can turn orders around in about as many days. On the other hand, Dell's strategy to utilize the IT developments of its strategic partners--such as Intel for processors, EMC for storage hardware, and Lexmark for its soon-to-be-released Dell-labeled printers--has led to some degree of misconception in the industry, Dell said. "Our strategy is not to reinvent the things our suppliers can provide us," he said.

Dell has about 500 patents of its own and enjoys a return on its research investments that is about three times better than its closest competitors, the CEO said. Dell said his company spent about $500 million on research and development last year, which brought Dell total revenues of about $31 billion. Based on the annual revenue figures, Dell spent about 1.6 percent of its revenues on research and development in fiscal 2002, which ended at the end of January. If history holds true, Dell will announce its third-quarter revenue in about a month, on November 15. The company is currently on a run-rate of $36 billion for the year.