PC Growth Crimped By ‘Alternative Mobile Computing Devices,’ Says Dell

Dell’s fiscal Q1 2013 results fell short of expectations on impact from tablets and a competitive notebook environment, Chief Financial Officer Brian Gladden said on an earnings call. Notebook sales were down 10 percent year-over-year due to an “aggressive competitive environment” in entry-level segments and emerging markets, Gladden said.

Addressing the entry-level PC market, Gladden said Dell has been focused on mid- to higher priced product “for a while” and will continue to do so even if that means walking away from some business. On whether Dell will respond to competitive pricing to regain share, CEO Steve Case said the price points where Dell is playing “still make up half the market and in some parts of the world two-thirds.” He compared the current situation to a couple of years ago when “Acer was pushing hard, and we said we were going to be disciplined because we didn’t think they could sustain what they were doing,” Case said, adding “we saw what happened to them.” Dell will continue to monitor the market and be competitive “in areas where we want to be competitive,” he said.

Gladden attributed some of the challenging notebook environment to channel inventory rebuilding following hard disk shortages of the past two quarters and more consumer IT spending diverted to “alternative mobile computing devices.” Presumably, the company will shorten references to “alternative mobile computing devices” to “tablets,” or Dell’s own term for the category, when it unveils its first tablets, on track for introduction with the launch of Windows 8, executives said.

The growth in the PC market “has clearly been lower than what we would have expected a few years ago,” Gladden said. Some of that is due to tablets, a “relatively new dynamic affecting the business,” he said. PCs are “still an attractive business,” generating “very good margins,” but there will be “pruning” as the company focuses on higher profit segments of the business, he said.

The product refresh cycle for Windows 8 is likely to be “very different from other releases,” Case said. The touch screen component will cost more to build but is a “welcome addition,” execs said. “You generally are going to need a new PC,” whether it’s a tablet, Ultrabook, notebook or desktop with touch capability, Case said. A Windows 8 product could be a “derivative hybrid of all of the above,” Case said, adding that Dell will have a “full complement” of products to support the Windows 8 launch. Gladden said corporate customers are still adopting Windows 7 so he doesn’t see “massive adoption” of Windows 8 by corporations early on.

Component pricing is a “mixed bag,” Gladden said, although slightly “more favorable” than previous forecasts. Memory and display pricing are expected to increase in Q2 and Q3, he said, coming back down in Q4. Hard disks will experience “some deflation” over the course of the year, he said.

Dell’s Q1 net income dropped 33 percent to $635 million on sales of $14.4 billion, down 4 percent year over year, the company said. Consumer revenue fell 12 percent to $3 billion, the company said. Dell continued its mix shift to enterprise and services segments during the quarter, and they now account for 50 percent of gross margin, Gladden said. Revenue for software and peripherals slipped 7 percent and is an area where the company will continue to see consolidation, Gladden said.