Dell Positioned for PC, Server Refresh, But Component Costs a Concern

AUSTIN, Texas, June 24 (Reuters) – Dell Inc (NASDAQ:DELL) 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 were down 5 percent in noon trading as the company laid out its strategy during its annual analyst day meeting, outpacing a nearly 1 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.

"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.

Dell, once the world’s largest PC vendor, now ranks No. 3 behind Hewlett-Packard Co (HPQ.N) and Acer Inc (2353.TW). The company has ceded market share rather than engage in price wars that would further pinch margins.

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.

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.

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 global PC units to rise 22 percent this year for the industry.  (Reporting by Gabriel Madway; Editing by Maureen Bavdek and Tim Dobbyn)