Focused on profits despite challenges: Dell

AUSTIN, USA: Dell Inc said on Thursday it is squarely focused on improving profitability and diversifying its business, but investors expressed doubts about the effectiveness of the company's turnaround plan.

Shares of Dell fell 6.4 percent as the company laid out its strategy during its annual analyst day meeting, outpacing a 1.6 percent decline in the S&P computer hardware index .

The company said it is well-positioned to reap the benefits of a strong refresh cycle among commercial customers as they replace aging personal computers and servers.

At the same time, Dell is still grappling with rising component costs and volatility in international markets, and its margins have been an area of concern for Wall Street.

Collins Stewart analyst Lou Miscioscia said investors are not sensing that Dell is making progress.

"What they're hearing is not much different than what they heard two years ago," he said. "It's the same set of challenges."

Dell executives said the company is aiming to increase operating income with better execution and supply chain management, and cost efficiencies, even as it strives to become less reliant on its low-margin PC business by greatly expanding its services, server and storage segments.

The company said its hopes to grow both its $16 billion enterprise solutions business and its PC segment faster than the overall market.

"We're on a growth strategy," Chief Executive Michael Dell said during the analyst meeting. "Last year was a challenging one for the global economy ... but this year we see the growth really coming back."

Dell on Wednesday forecast a 14 percent to 19 percent rise in fiscal 2011 revenue, with non-GAAP operating income up 18 percent to 23 percent. It was the first time the company had provided a formal outlook since 2006.

Cross Research analyst Shannon Cross said investors were not impressed with the outlook, and she said Dell's commentary at the meeting was more focused on long-term goals.

"They didn't take up guidance, they didn't give anybody a reason to buy near-term," she said.

Dell, once the world's largest PC vendor, now ranks No. 3, behind Hewlett-Packard Co and Acer Inc. The company has ceded market share rather than engage in price wars that would further pinch margins.

Jeff Clarke, vice chairman of operations and technology, acknowledged that the company's PC business has struggled as the market shifted, but he emphasized the importance of the segment.

"We've lagged and we've fallen behind ... we're working hard to change that," he said.

In a media session after the meeting, Michael Dell said PC unit market share is not how the company measures success.

"Units would not be the priority ... we're much more focused on the profit share and the revenue share," he said.

Dell said other vendors sell more PC units than Dell does but have "substantially less" revenue and profit in the same product categories.

The company reiterated its longer-term goals for annual revenue growth of 5 percent to 7 percent with an operating margin above 7 percent.

The company said it will continue to be acquisitive, with its focus mainly on smaller deals. Dell has roughly $11 billion in cash and investments.

Margin Focus

Investors remain focused on Dell's profitability, particularly in its consumer business, which has been a drag on the overall company. Dell said longer-term it hopes to improve the operating margin in the consumer business to a range of 4 to 5 percent.

Last month, Dell reported quarterly sales and profit that beat expectations, but its gross margin fell short of Wall Street's forecast.

Chief Financial Officer Brian Gladden said that while average selling prices are improving, there are signs of weakening demand from consumers in Europe, and component pricing and foreign currency volatility continue to be challenging.

Despite Dell's efforts to diversify, PC sales still make up more than half of its sales, with the company particularly reliant on sales to U.S. businesses.

Demand for PCs has roared back, and research group Gartner expects shipments of global PC units to rise 22 percent this year for the industry.