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Annex Bulletin 2005-14                            May 13, 2005

Confidential Client Edition



Analysis of Dell’s First Quarter Fiscal 2006 Business Results

Dell Rings the Bell

Stock Surges on Double-digit Growth in Most Markets and Segments

PHOENIX, May 13 – Dell rang the bell this morning on the New York Stock Exchange with its first quarter fiscal year 2006 business results.  Not only did Dell’s stock surge by over seven points; it also pulled by the bootstraps various other competitors’ shares in the process (see the chart).  The “Annex 19 IT Index” was up 1.5% for the day even though the Dow Jones industrials declined almost 50 points (see the chart).

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And no wonder… Dell’s net income was up 28% in the quarter to $934 million on a 19% revenue surge to $13.4 billion.  The company also set a new quarterly record with $2 billion of stock buybacks, much more than the company would need for entire year’s stock options, according to Jim Schneider, its CFO (also see “The Phantom Is Back,” May 2005).

Horizontal Segments.  Nearly all Dell market and business segments grew in double digits.  The only exception was the PC desktops, the company’s largest business segment, whose revenue increased by 6% to $5.3 billion, while its unit shipments rose by 14%.

Leading the first quarter charge was the storage business that soared by 49% to about $400 million (3% of total), thanks in part to the Dell-EMC partnership (last month, the EMC stock also soared the day it announced its first quarter results).

Services was Dell’s second fastest growing business segment, jumping 30% to $1.1 billion in the quarter.  This activity now represents about 8% of Dell’s business.  Within that, professional services grew by over 50% in the quarter.

Yet even though it is growing so fast, the services business does not portend a transformation of the company itself, as had been the case with IBM in the early 1990s, and with HP in the last five years.  At Dell, hardware still comes first.

“Our services strategy is to tie it to our hardware products,” said Kevin Rollins, Dell’s CEO, in a teleconference that followed the earnings release.

Text Box:  That is also evident in a relatively modest share that Dell expects its services segment to represent enroute to becoming an $80 billion-company, something that will probably occur in the next three to four years (see the Dell chart).

Software & peripherals and Mobile products grew by 29% and 22% in the quarter to $2 billion and $3.3 billion respectively. 

Servers also grew in double digits – up 12% to $1.3 billion in the quarter.  Their unit shipments rose even faster - up 25%.

Geographies.  Europe was Dell’s best-performing region in the first quarter.  Its revenues surged by 20% to $3.17 billion.  It was the company’s sixth successive quarter of 20% or higher revenue growth on the Old Continent.

Services revenue in Europe was up 55%; server shipments were up 23% (Dell claims to have gained 1.2 points of market share to 19.6%); storage revenue was up over 60%; mobile products’ revenue was up almost 40%; software and peripherals’ revenue was up 35%.

In short, business in Europe is great (!) – from Dell’s perspective.

Dell’s success on the Old Continent, as well as that of other leading IT competitors, stand in start contrast to IBM’s woes in this part of the world (see “IBM: Slammed and Dunked,” Apr 15).  It is true that the growth in Western Europe is slower than that in Central and Eastern European countries.  But that’s nothing new.  We’ve been saying that for years (see “Eastern Europe Renaissance,” June 1996). 

Dell’s biggest differentiating factor from IBM is not in products; it’s in the two companies’ respective customer sets.  Dell does not depend on large enterprises for its growth.  The enterprise market represents only about 10% of Dell’s business versus more than three-quarters of IBM’s. 

What is becoming increasingly clear, therefore, is that Europe is an IBM problem, both strategic and tactical, not an IT industry problem (see the chart). 

Guess IBM itself recognized that when it announced its latest restructuring in early May.

Meanwhile, back to Dell, Asia/Pacific revenues were up 19% to $1.7 billion, with strong growth in all key product areas. 

*       Server shipments up 37%;

*       S&P revenue up over 50%

*       Dell Printer unit shipments up 5X

     *       Services revenue up over 40%

Finally, Dell’s biggest geographic segment, the Americas region that accounts for about two-thirds of its business, also chimed in with double-digit growth in the latest quarter.  The business market segment grew by 15% to $6.6 billion, while its consumer market increase by 12% to $1.9 billion.

Server shipments were up 22%, while notebook shipments surged by more than 35%.  The Americas’ non-U.S. revenue growth was also impressive, rising by 32%, thanks to a strong performance of storage, services and software & peripherals products.


“More of the same” is basically a summary of Dell’s future outlook.  Indeed, why change a winning strategy.  If Dell stays the present course, we figure it may be an $80 billion-company by 2008.  And Dell has a chance of achieving that without any major strategy changes or fancy new corporate restructurings or acquisitions.

Dell’s success in the last 15 years has been a case of believing in business basics – delivering the best value to customers in a most efficient way – and not wavering from that course no matter what the competition did.  It has served it well. 

“Keep it simple” and “keep an eye on the ball” are indeed some of the most basic success tenets in business as in life.  Yet so few companies and people practice them, allowing themselves to get distracted with competitors’ fancy footwork; or crowd-pleasing “Hail Mary” plays.  Not Dell.

Instead, while sticking to basics in business, Dell has also learned to be a Wall Street crowd pleaser.  It has spent $18.3 billion of dollars on stock buybacks (1995-2004), delighting its Wall Street cheerleaders.  That’s 12% more than its cumulative earnings during the last 10 years, and proportionally more than even IBM had spent.  In its last full fiscal year, Dell spent about eight times more on share repurchases than on all other capital investments ($4.2 billion vs. $525 million).

The record $2 billion first quarter stock buybacks suggest that Dell is not wavering from that course, either.  On the contrary…

But the biggest reason Dell is ringing everyone’s bell is its ability to win in good times and bad (the latter from competitors).

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT: Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use appropriate  keywords.

Volume XXI, Annex Bulletin 2005-14
May 13, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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