All the animus aside, what’s to be learned from Dell’s gradual demise?

The company looks like a lingering holdover from the 90’s that hasn’t adapted to the realities of the new century. Gateway is gone. Sun is seemingly going nowhere. Dell is slowly imploding with a stagnant share price that’s trading at 2002 levels despite billions of shareholder dollars exhausted buying back shares thus shrinking the equity base of the enterprise.

There’s nothing new at Dell IMHO other than a late attempt to move to high volume, low-margin sales through discount retailers and some mention of attempted growth in markets that represent stiff competition from home-grown competitors. Is there anything unique Dell can export into these markets in terms of technologies or efficiencies?

Dell is losing it in the US and there’s no quick way to turn around the company’s prospects of falling market share and reduced margins.

In all, is IP the name of the game?

We may see another round of share buybacks. But that will do little more than increase Michael Dell’s percentage of ownership. Layoffs may cut costs but that doesn’t make the company an attractive place to work and without the expectation of a rising share price wage demands for execs will rise and perhaps the best and brightest will look for the proverbial greener pastures. Is it time for Dell to go private to fix its issues outside of the public glare and the 90-day report card or is the share price still way to high to make that an attractive option for private equity partners?

What are the biggest lessons to be learned from the gradual demise of this once high-flier?

I think the main lessons relate to the PC world’s race to the bottom to cut costs and maintain market share. Eventually quality suffers, and that’s when the customers go flying away. Dell’s loss, HP’s gain.

Once customers disappear, it’s hard to bring them back. Just ask Apple.

Part of the current problem lies with Windows PCs in general. They are seeming more and more like general office supplies than objects of joy and excitement. Vista, which is symptomatic of Microsoft’s complete lack of vision, is compounding this problem. The wow starts now? I don’t think so.

IMHO, Dell will need to find something that makes them special if they want to pull out of the doldrums. All we are hearing right now is a bunch of corporate speak, and that just won’t get the job done.

Dells is essentially the biggest white-box reseller on the planet, without IP of its own. Dell’s original success came from bypassing a costly retail channel; then it came from buying power; then it came from financial engineering. Running through all this was the need to constantly grow revenue for the cash this generates for any mail order operation.

The retail channel became efficient at the same time as PC options like sound and networking fell in cost to pennies, and there was no longer a reason to build to order. Dell’s growth switched to buying, fire sales and daily manipulation of product specs and prices. The final phase of Dell’s growth at the expense of its competitors was achieved by huge buying power; they were often able to commit to buy a supplier’s entire production. If they didn’t sell it at list, they were always able to shift it in very high volumes at prices no-one could match. (Also buying obsolescent overproduction - easy to shift to their innocent direct customers). But in the last couple of years this stopped working, and suppliers found Dell weren’t taking the agreed 100% of their production. Suppliers were burned; Dell’s ability to negotiate lower buy prices than competitors was crippled, and Dell’s ability to keep everything flowing by means of fire sales of top spec products was destroyed. They are having to learn to manage the supply chain properly like other manufacturers, and guess what, they aren’t particularly good at it.

In short, if your business “economic moat” is built exclusively on growth, you will eventually grow the business until it implodes. The market simply cannot feed it any more. Competitors, each with their own economic moat not dependent on growth, will gradually eat your business.

Of course the PC market is at different stages in different areas of the world. But the new markets won’t exactly replay what happened in the US, however much Dell may wish it.

[quote author=“sleepygeek”]In short, if your business “economic moat” is built exclusively on growth, you will eventually grow the business until it implodes. The market simply cannot feed it any more. Competitors, each with their own economic moat not dependent on growth, will gradually eat your business.

Of course the PC market is at different stages in different areas of the world. But the new markets won’t exactly replay what happened in the US, however much Dell may wish it.

A business model that implodes should sales growth slow or plateau and with more low-cost players in the market competing with suppliers for the same production cost advantages are lost, leading to lower margins.

No wonder Dell is discussing challenges it faces as the fall in component prices as a benefit to margins is compromised through greater competition. Not a pretty picture IMHO.

I’m posting this article from SeekingAlpha in all its glory because it is a perfect demonstration of how backward-thinking so many investors and analysts are. Read, gasp, and weep at the ineptitude of this guy, and pity the poor bastards who, following his advice, have been buying DELL for the last couple of years:

Looking to Buy More Dell
by Jason Kelly

The Kelly Letter bought Dell at $29 two years ago. So far, we’re down 15%.When we bought it, Dell was trading at a price 31% lower than it had been 11 months prior, and looked to have established a bottom at around $30. Since we bought it, the stock has traded in a rough range from $30 to $22.

At Friday’s close of $24.54, it’s currently in the bottom third of that range. Dell shares fell 13% on Friday, following the company’s 3Q earnings results. Profits were up, but by a penny less than expected and margins were down. Michael Dell said that his company is enjoying “solid progress” in its turnaround. He said the firm expects to be a leading consumer brand, grow overseas, and make enterprise IT easier. He wants designs that create “product lust” the way Apple’s do.

There were several positives to help us feel good about holding shares. To me, the report was typical of a company still in turnaround mode, with nothing frightening at all.The company will begin buying back stock next week, an excellent vote of confidence in its future. Costs continue coming down. Retail partnerships are growing, a necessary step to compete with HP. That, combined with Dell’s plan to roll out compelling new designs, should yield good results.

Michael Dell said in the conference call: “So with nearly 10,000 stores by year-end, we’ll soon be at about 27% of the top retail doors globally. It’s all about increasing a customer’s opportunity to see, feel, and experience Dell products.”

Also, notebook sales are roaring back to life. That segment is important because it’s the public face of a computer company. It’s where the logo is most often seen, the hardware that people notice in airports, and what shows up most frequently in movies, music videos, and other mainstream fare. It’s at the heart of the “it’s cool because cool people are using it because it’s cool” cycle that consumer goods depend upon.

Michael Dell said: “We’ll lead in the next generation of wireless, including WiMAX and 4G. We’re shortening our development cycles and bringing products to market 40% to 50% faster, and as I’ve already mentioned, fantastic reviews on our latest new notebook products. When placed side-by-side against our competitors, our notebooks are second to none in performance, design, quality and simplicity.”

I’ve long written that the vast majority of computer users have no idea what’s inside, or care anymore. As with a car, the exterior is more important than the engine. Any modern computer can get anybody’s work done these days, with the same keyboard, the same screen, and the same set of capabilities.

That leaves only price as a differentiating factor, right? That’s what many analysts contend. They say that computers are commodities and that selling commodities is a crummy business. It’s a losing proposition for all concerned because prices drop to rock bottom and every company loses.

However, introduce the concepts of branding and design and suddenly not all electronic goods are the same anymore. Ditto cars, whiskeys, and handbags. Any portable music player can play music, but you’d rather have an iPod. Any car will take you to the grocery store, but you’d rather show up in a Benz. Any whiskey tastes like whiskey, but you’d rather have Jack Daniel’s or Suntory Hibiki (in my neck of the woods, at least). Any purse will carry a wallet, but you’d rather have a Louis Vuitton.

I believe Dell is creating the next must-have line of consumer electronic goods, a category in which I place the computer. That’s the good news.The bad news is that its turnaround is taking a lot longer than I expected, and I think solid results are still at least a year away. Between now and Dell’s “iPod moment,” there will be more disappointments like we saw on Friday.

Chief Financial Officer Donald J. Carty said as much in the conference call: “...we are going to continue to incur one-time costs as we restructure to improve productivity and execution, reduce headcount where appropriate, and invest in infrastructure and acquisitions. In addition, our near-term results could be adversely impacted by a slower decline in component costs than we saw earlier in the year and a seasonal shift in mix to U.S. consumer and international regions.”

The Kelly Letter will not look to double down on Dell anywhere over $24, and probably not until $20. I’m hoping for some disappointing results again that knock the price lower as those who don’t understand what Dell’s doing dump the shares.This is a common technique in the letter. We often build positions in turnaround stocks and average down once or even several times as the price finds a bottom. Eventually, the price heads back up and, as Bill Miller says, “lowest average cost wins.”

While the letter is just watching Dell for the right time to buy more shares, we have an active order in place to buy shares of a company that’s down 30% since we first bought. The last time we bought more shares of a company that was down 30% from our initial buy price, it recovered dramatically and is now sitting on overall gains of +27%.

All that money tied up all that time for nothing. What a waste.

I predict more consumption of Jack Daniel’s in Mr. Kelly’s future than of Mercedes Benz or Louis Vuitton products.

[quote author=“Tommo_UK”]

All that money tied up all that time for nothing. What a waste.

WTF? You sit on an underperforming asset for yet another year with no guarantee of a positive return, it’s paying no interest or dividends while you expect it to decline further?  :o

Even if he liked Dell wouldn’t common sense suggest dump one’s holdings now, bank the bucks, earn some interest and buy more shares with the same money once it bottoms?

Most.Fawning.Forbes.Piece.Ever.

Link .

Talk about brown-nosing.

[quote author=“Tommo_UK”]Most.Fawning.Forbes.Piece.Ever.

Link .

Talk about brown-nosing.

Amazing. How is it there hasn’t been a mention that Michael Dell never left? He’s in the same office, he just changed his title. 

[quote author=“DawnTreader”]Amazing. How is it there hasn’t been a mention that Michael Dell never left? He’s in the same office, he just changed his title. 

... and when Rollins was named CEO, Dell explicitly said there would be no change in the way the company was managed - they were two halves of one brain, desks separated only by a glass screen.

Dell confirms it will waste a further $10B on share buybacks:

08:31 EDT DELL Dell Inc-DELL announces $10B share repurchase program
Dell will resume the share repurchase program this week.

Stock up 2.5% on the news.

08:54 EDT DELL Dell Inc-DELL buyback a non-event, old buyback was running out@UBSW
UBS said the DELL’s $10B buyback announcement is a nice headline but a non-event. The firm said the buyback will not be fast and replaces the previous one that was running out.

In spite of a $10B buyback, DELL closed down 1.5%. Is reality dawning on the deluded?

This in:

16:38   DELL Dell plans to explore small Chinese cities - ChinaTechNews.com (23.60 -0.34)  -Update-

ChinaTechNews.com reports Steve Felice, president of Dell Asia Pacific and Japan, says that Dell plans to achieve a double-digit increase in sales of the Asia Pacific and Japanese mkt over the next few years. Felice told local media that Dell hopes the revenue increase of the Asia Pacific and Japanese region can grow faster than that of the entire co. He also says that Dell will increase its business from the current 45 Chinese cities to 1000. Dell’s business is currently mainly focusing on bigger Chinese cities, but they will expand to smaller ones in the future.

So Dell is going to spend more money attacking a market dominated by dirt cheap PCs from local manufacturers with whom the company can’t hope to compete with on price. Say good-bye to whatever razor-thin margins still exist in this bottom-of-the-barrel market.

DELL is going down the crapper.

Someone (presumably Dell themselves) is going to have to come up with a lot of capital to finance the product that’s going to be in the retail channel now that they are apparently going retail worldwide. (Although I haven’t myself seen any Dell PC’s in store at Dell’s apparent UK retail partner Carphone Warehouse).

Listening to the unhappy conference call, I felt Michael Dell now knows it’s probably all over, but Don Carty is simply a passenger who doesn’t really understand the business.

[quote author=“Tommo_UK”]Dell confirms it will waste a further $10B on share buybacks:

08:31 EDT DELL Dell Inc-DELL announces $10B share repurchase program
Dell will resume the share repurchase program this week.

Stock up 2.5% on the news.

08:54 EDT DELL Dell Inc-DELL buyback a non-event, old buyback was running out@UBSW
UBS said the DELL’s $10B buyback announcement is a nice headline but a non-event. The firm said the buyback will not be fast and replaces the previous one that was running out.

What’s interesting to note is that Michael Dell (according to the reports I could quickly find tonight) is the single largest shareholder of the company. A $10 billion buyback would reduce the outstanding shares by almost 20% at today’s closing price.

Completing this buyback (assuming the share price remains constant) would not only increase his percentage of company ownership, it will also significantly reduce the percentage of shares available to the public.

For the kinds of decisions this company may need to make to turn its conditions around, perhaps it would be best to take the company private and do the work away from the public glare.

If the only real means to raise EPS in the short-term is by reducing the number of shares, it’s not a pretty picture being painted.

I wonder what exposure DELL might indirectly have to sub-prime woes, given the possibility it may have exposure in its finance division to the lower end of the consumer market who bought their PCs on expensive finance plans, and more importantly who are probably also amongst the less credit-worthy (relatively speaking)?

Am I off-base wondering about this?

In the meantime, more DELL-love from Needham.

08:30   DELL Dell resumed with a Buy at Needham- tgt $28 (23.60 )

Needham resumes DELL with a Buy and a $28 tgt saying after twenty years on the top of the technology heap, Dell began losing its focus and edge beginning in 2005. A victim of its size and success, the co needed to be reformed from top to bottom.

Now, reinvigorated with new (and old) management, an updated product line, broadened channel avenues, and a lower cost structure, the firm believes Dell has begun to write a new chapter in its overall success story.

A new chapter, sure. The final chapter.

Dell will return to being a successful company when it sells its computers on the strength of their design rather than lowest price. It has the money to re-invent itself, and Michael Dell is a smart person, but does management have the guts to actually believe that selling computers in pretty boxes will sell well?

R&D from F2003 to F2007 grew 10%, where at Apple it grew 50%. Only in the past year does it seem as if R&D is getting some money. So far for F2008 R&D it has grown 30%.

Its cash reserves are about $12B and its shareholder’s equity has been growing, but are both lower than Apple.

I believe Dell is a viable company and it could avoid the fate of Gateway and become more of a technology driver than technologically driven. But my money is on Apple, on which my doubts have been driven to nil.