Dell Says Uncle, Readies Opteron-Based PowerEdge Servers

Published: May 24, 2006

by Timothy Prickett Morgan

Late last week, server and PC maker Dell announced its financial results for the first quarter of fiscal 2007, which were somewhat disappointing because Dell is seeing revenue growth slow and profits decline. And, to get back to growing again, Dell is taking a number of actions, including adding Advanced Micro Devices as an alternative processor supplier for its PowerEdge server line, wringing $3 billion in costs out of its structure, investing in employee training, and expanding its support facilities.

Dell's first quarter was more or less in line with the revised guidance it gave a little more than a week ago, which sent its shares tumbling. For the quarter, Dell booked $14.2 billion in sales, an increase of 6 percent from the prior year, but operating income fell by 19 percent to $949 million and net income fell by 18 percent to $762 million. Because Dell has been aggressively buying back its own depleted shares, which were trading in the range of $40 a pop last summer, but are kissing $24 a share these days, and that means it can goose earnings per share. So for the quarter, earnings per share fell to 33 cents, only off 11 percent. Assuming Dell's stock rebounds--and all of Dell's top brass certainly believe it will in the long run after the price cuts and other actions it is taking--this might be a good investment. Then again, when someone starts a price war in the IT business, no one ever really recovers. The trick is to not push pricing actions too far.

"We believe our growth has slowed because we kept margins too high," explained Jim Schneider, Dell's chief financial officer, in a conference call with Wall Street analysts. (Dell began taking pricing actions a few weeks ago, and is not saying where because it doesn't want to help its competitors figure it out.) "From a pricing standpoint, we are trying to be a bit more selective, but at the same time, be a little more aggressive across the board," he explained.

Michael Dell, the company's founder and chairman, and Kevin Rollins, its chief executive officer, went to great pains to explain that historically, it has been able to boost revenues by cutting prices and then aggressively managing costs in its supply chain and manufacturing operations to wring profits out of the business, even though average selling prices have falling. Dell is counting on this trick to work again. Rollins said that the competitive environment in the PC and server markets was "more intense" than Dell had "planned for or understood," adding that as Dell kept prices high to protect profits, it allowed competitors who had got their acts together and cut costs to come in and win some business. Of course, many of those competitors have been using AMD's Athlon processors in PCs and Opterons in workstations and servers to get an edge--both in terms of performance and profits--over Dell.

The move to AMD's Opterons in the PowerEdge server line is very specific, and is limited to its four-socket PowerEdge machines, those that currently use single- and dual-core Xeon MP processors. Dell said that it would have four-socket machines using Opteron processors--presumably the "Santa Rosa" RevF Opterons due in the third quarter--by the end of the year. For now, Dell seems content to wait for Intel's dual-core "Woodcrest" Core processors, which are expected this summer for two-socket machines. "In the MP space, we think we can do better, and the Opteron is going to help," explained Rollins.

Why it took Dell so long to move to Opterons is a bit of a mystery. If the reason is performance and the advantages that the Opterons have over the Xeons, then Dell should have done this years ago, like Sun Microsystems, IBM, and Hewlett-Packard. One has to believe that Dell's Intel-only policy on processors and its high volumes allowed it to secure very good prices--and therefore profits--on Xeon-based servers, but with Opteron now a credible chip and offering benefits that make them competitive with Woodcrest, Dell must have decided that Intel will be fighting AMD for performance and thermal advantages for many years to come, at least at the high end of the server market (or more precisely, Dell's high end). For all we know, Dell will launch much larger Opteron-based machines than just a four-way box, too, and thereby take one some higher-margin server business. As for whether or not the company would consider using AMD processors in smaller servers or PCs (which it does now in a limited way thanks to its acquisition of modder Alienware), Dell was blunt but vague. "We'll deliver the best technology to our customers," he said. That apparently means Intel's dual-core "Merom" chip in laptops and "Conroe" chip in desktops--but not Athlons or Opterons.

In addition to cutting prices to boost demand, Rollins outlined plans to improve customer service. He said that Dell was investing $100 million to improve the "customer experience," including adding 2,000 new sales and support people in the United States. Call centers have been expanded or added in Ottawa, Nashville, Oklahoma City, and Manila. Dell has recently retrained 5,000 support staff, and has been able to reduce support call hold times by 50 percent. As this fiscal year closes in nine months, Dell will have spent the past two years opening 14 new manufacturing, call center, and design facilities worldwide. To pay for the price cuts, Dell is accelerating its plan to cut $3 billion in costs out of its business this fiscal year, which include component costs, manufacturing efficiencies, and hitting up suppliers for better warranty terms on components.

On a product line basis, Dell said that laptop sales were up 12 percent for the quarter, with shipments up 36 percent; desktop sales were off 3 percent with unit volumes up 4 percent. Enterprise revenues--which include servers, storage, and related services--increased 10 percent in the quarter. PowerEdge server shipments were up 8 percent, but because of price pressures and model mix, sales rose only 3 percent. Storage sales were up 12 percent of the year, Dell said.