Issue #0719/2 - Dell struggles to recover from a troubled year and sheds nearly 10% of jobs in a bid to improve operating margin at a time when the future still looks bleak.
Following last week’s issue of TCPglobal (Issue #0718 posted 25th May 2007), Dell has announced preliminary results for its first quarter of the fiscal year 2008 (ends January 2008) with plans to axe nearly 8,000 jobs.
Having been under investigation for its accounting practices for almost a year now, the move to lose nearly 10% of its workforce must be seen as a measure of desperation in troubled times.
Figure 1.
Apart from suffering costs of $46m in this last quarter on the investigation, Dell’s financial position has been under severe pressure since the high point at the end of 2006. The final two quarters of the financial year ending January 2007 (Q3 and Q4, FY2007), saw Dell reporting record revenues and year-on-year revenue growth rates in double figures. In fact, earlier that year, year-on-year revenue growth rates were well into the middle of the double digits.
From the following quarter (Q1, FY2008), the company hit a very rough spot during which year-on-year revenue growth rates first slumped to 6% and 5% and then hit a negative figure of -5% in Q4, FY2007 (last year’s Christmas season).
Figure 2.
While Operating Margin was sitting at a fairly healthy 8.8% in Q1, FY2006, a year-on-year increase of 5%, Operating Margin had begun to slide even before the company posted those record revenues at the end of the year, hitting a low of 4.3% in Q2 of FY2007. This slide represents declining Operating Margin with a year-on-year difference that reached -51% at this low point. Although the decline has slowed with a gradual improvement in Operating Margin, Q1, FY2008 still saw negative growth from the same quarter last year.
Figure 3.
It is very difficult to speculate what part printers play in these results as Dell has never provided much in the way of detailed financial breakdown that allows an analysis. Since the start of the investigations last summer, only a basic revenue breakdown by business unit has been provided and no data relating specifically to printers and imaging.
Printers fall into the Software and Peripherals group, reporting revenue that represents around 15% to 16% of total company revenue. On average, revenue growth has been fairly consistent over the last couple of years, just with a peak at the end of 1995 – a period that can probably be identified as the peak of Dell’s printer activities so far.
Even though growth has been fairly steady and consistent, we must remember that within Software and Peripherals, printers were a start-up operation, hence seeing high revenue growth rates 18 months to two years ago. Since then, revenue growth has declined as steadily as revenue has grown.
Although we cannot be absolutely certain, we can surmise from this data that printer sales have probably levelled off to a large extent. Additional evidence to support this theory is Lexmark’s declaration (see last week’s issue of TCPglobal - Issue #0718 posted 25th May 2007) that OEM sales of inkjet and laser printers have declined. Only Dell’s colour laser hardware is not purchased from Lexmark.
However, what we can also be fairly sure of is that this financial crisis is one that is company wide and not restricted to one particular product group. After all, the percentage of revenue contributed by the Software and Peripheral group has remained at a very consistent 15% to 16% throughout. Just in the one quarter (Christmas 2006) did the proportion rise to a high of 16.7%, a quarter when company revenue remained flat.
While this does not point to Dell being ‘in trouble’, it certainly points to the company being ‘troubled’. In January of this year, Michael Dell (founder and Chairman), decided that he should replace former CEO, Kevin Rawlins, in the CEO’s chair – clearly blamed for the downturn in fortunes.
When announcing the 7,800 job cuts a few days ago, Michael Dell indicated that it was to “simplify information technology for our customers by removing cost and complexity”! In other words, ‘Dell needs to reduce operational costs in order to raise operational margin so that investors and Wall Street are kept happy. Otherwise, the company hits the complex situation of having no money, going out of business and leaving customers in the difficult position of having no IT support for their hardware’.
At a time when we see Hewlett-Packard increasing both revenue (13% year-on-year) and operating profit (28% year-on-year), and with operating profits of 9%, for Dell to be struggling to recover from declining revenues in this way is actually a very serious position and one that Hewlett-Packard is sure to be revelling in.
| Software & Peripherals | Revenue ($bn) | Growth (y-on-y) | Printers (percent of total revenue) |
|---|---|---|---|
| Q1, FY2006 | 2.0 | 29% | 14.9% |
| Q2, FY2006 | 2.0 | 35% | 14.9% |
| Q3, FY2006 | 2.1 | 25% | 15.1% |
| Q4, FY2006 | 2.4 | 22% | 15.8% |
| Q1, FY2007 | 2.2 | 11% | 15.5% |
| Q2, FY2007 | 2.2 | 10% | 15.6% |
| Q3, FY2007 | 2.3 | 10% | 16.0% |
| Q4, FY2007 | 2.4 | 0% | 16.7% |
| Q1, FY2008 | 2.3 | 5% | 15.8% |
After all, Dell claims that it benefited from advantageous exchange rates in the purchase of components and “a focus on more richly configured customer solutions and a better mix of products and services yielded significantly higher average selling prices [14%] and a better balance of profitability and revenue growth”. And yet, the company only just managed to pull revenue growth up above the zero line by 3% but with a 3% decline in its operating margin.
Looking forwards, Dell’s statements indicate that the company expects to have a difficult year while the investigation grinds on, competition remains strong, component prices rise while sell-on prices are pressurised and the company enters the seasonal slow-down of the summer months.
| Total Company | Revenue ($bn) | Growth (y-on-y) | Operating Margin* | Year-on-year difference | Sequential difference |
|---|---|---|---|---|---|
| Q1, FY2006 | 13.4 | 16% | 8.8% | 5% | 0% |
| Q2, FY2006 | 13.4 | 15% | 8.7% | 1.2% | -1.1% |
| Q3, FY2006 | 13.9 | 11% | 8.6% | -2% | -1.1% |
| Q4, FY2006 | 15.2 | 13% | 8.2% | -7% | -4.7% |
| Q1, FY2007 | 14.2 | 6% | 6.7% | -24% | -18% |
| Q2, FY2007 | 14.1 | 5% | 4.3% | -51% | -36% |
| Q3, FY2007 | 14.4 | 1.4% | 5.7% | -34% | -33% |
| Q4, FY2007 | 14.4 | -5% | 5.5% | -37% | -3.5% |
| Q1, FY2008 | 14.6 | 3% | 6.5% | -3% | 18% |
* (percent of revenue)
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