Dell's long view irks investors

The frustration among Wall Street analysts was palpable last week as Dell set out to explain the worse-than-expected drop in profits that battered shares in the world's second-biggest personal computer maker on Friday.

Shares in the company fell more than 12 per cent the day after Dell disappointed investors who had been hoping for further evidence that the turnaround launched more than 18 months ago by Michael Dell, chief executive, had begun to produce significant and, above all, consistent results.

Thursday's conference call highlighted the degree to which Dell and Wall Street appear to be at odds over how best to manage the trade-off between sales growth and profits as the company grapples with sweeping changes to its business model. "What management systems are you putting in place to prevent this going forward?" asked David Bailey, an analyst at Goldman Sachs, after Brian Gladden, Dell's newly appointed chief financial officer, said overly aggressive pricing in Europe had backfired, leading to an unexpected drop in net profit as rising sales failed to offset the impact of lower prices for Dell PCs.

Many on Wall Street believe that Dell, which has been struggling against slumping sales and profits for the past three years, should put profits first.

"We continue to believe that investors would much rather see stable operating margin improvement from Dell with more modest revenue growth than stronger revenue growth and spurious margin performance," wrote Toni Sacconaghi, an analyst at Sanford Bernstein, in a research note on Friday, the day after the conference call.

But, on Thursday's conference call, Dell executives seemed to take a different view.

"We are actively managing the decisions around where we are going to grow and where we are going to invest in strategic pricing," Mr Gladden replied to Goldman. "Sometimes it's difficult to judge whether you are pushing it too far."

Mr Gladden pointed out that Dell had increased its share of the consumer PC market by 9.1 per cent in the second quarter - double the broader industry growth rate in a market where it has long struggled.

He said a raft of new Dell products - including the launch last week of a new series of computers designed for small businesses in fast-growing emerging markets - would make Dell more competitive in countries such as China and India, which are the source of most new PC sales growth.

The testy exchanges reflected growing investor frustration over a company that, until three years ago, was renowned for its consistent outperformance of industry peers.

In recent quarters, Dell has cut thousands of jobs and sought to move beyond two decades of reliance on direct sales of computers and other IT equipment to customers over the telephone and internet.

Among other things, Dell has struck deals to sell its computers in thousands of retail stores globally. It has also moved to embrace so-called "re-sellers" - outside companies that design and install computer systems for small businesses and big corporate clients. It has also revamped its design and accelerated its rollout of new products to boost sales.

While such activities helped increase sales more than 11 per cent in the second quarter, they are all less profitable than Dell's traditional direct sales business.

For the time being, Dell appears content to press on with its plans in spite of the groaning on Wall Street.

After three years of ups and downs, investors could be forgiven for feeling frustrated about Dell's insistence on taking the longer view.

By Kevin Allison

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