Dell CFO makes money by saving money

The PC giant relies on efficiency to boost profits.

6 min read
A penny saved is a dollar earned.

That would appear to be the motto of Dell Computer chief financial officer James Schneider, who is proud of how the PC manufacturer makes money by saving it. Schneider talks a lot about boosting income by cutting costs, even as some rivals struggle to squeeze a profit out of selling PCs.

He also believes this approach will help Dell meet its original third-quarter earnings estimates, despite a profit warning in early October that cut projected revenue growth by 3 percent. Even though Dell joined Apple Computer, IBM, Intel and other computer industry heavyweights issuing warnings about the third quarter, Schneider is confident PC growth will remain strong.

Cheerful but serious, Schneider is a true believer in Dell's sales model of selling systems When I look at the penetration into new markets, I say it's fairly optimistic. I don't think it's realistic (we'll) grow 50 percent again. directly to the customer. After all, it is cost-effective, with no dealers to pay and better price management for components.

Schneider spoke with CNET News.com's Joe Wilcox during Dell's recent DirectConnect conference in Austin, Texas, and later following the company's surprise profit warning.

CNET News.com: You seemed on track for the quarter during DirectConnect, but just two weeks later you warned of slower revenue growth. Why?
Schneider: We expected business to start ramping in September, and probably with the latest information we had when we got to DirectConnect--with less than half the quarter done but probably no more than 40 percent of the revenue expectation in at that time--things looked OK. We started to see announcements from Intel and other people about that time, but still our business looked OK.

Going forward just a couple weeks made a big difference here, when we had planned to grow about $800 million or so sequentially in the quarter. Last quarter it was about $7.7 billion in revenue, and third quarter we were expected to get between $8.4 (billion) and $8.5 billion. That's like $750 (million), $800 million in growth...It was still growing and even giving revised expectations of three points less--that's sequential growth of $500 million or $600 million.

You issued the warning during your analysts meeting in Austin. Why there? Why then?
Going into the analyst meeting and getting into this new era of these new disclosure rules, it felt like the time to caution people the revenue wasn't trending to the extent we wanted to.

Do you think, given the new disclosure rules, companies are more cautious and more likely to issue warnings?
I think even under the old rules, we would have done something because of the analysts meeting. But I think if we had known We've consistently been the pricing leader. We've been able to do that because we are fixated on keeping our cost lower than anybody else in the industry. something like this intra-quarter in the past, as you start becoming aware of this, you would start putting out information via the analyst community.

I think the rules are going to make intra-quarter conversations like this more and more difficult, because you either put out some press release or you really can't say anything else.

Do the new rules make your job more difficult?
In the past, if we had thought there was a little softness, we would have started to signal that. In the future, you're going to see people have to make a decision: "Do we see enough information that we put a press release out, because otherwise we can't say anything to anybody."

In the future when you have bits and pieces of information that you could have put out in a more balanced way, you're going to say absolutely nothing or put out a big press release. So I think the disclosure rules, in my viewpoint, make it really tough to work in the future.

Despite revenue growth lowered to 7 percent from 10 percent, do you think you can hit your earnings per share (EPS) target?
I'm confident about the original EPS for this quarter. It was supposed to go up about three cents. Component costs have come down, and we've been pretty aggressive on pricing.

With component costs declining, we've seen a slight increase in margins. At the revenue levels we're seeing right now, we can still hit our EPS for this quarter.

Softness in Europe contributed to problems. But unlike IBM or Intel, which saw slow sales, Dell attributed the problem to logistics. Could you explain?
We're still expanding there. We tend to start on a very small base, until you get some scale. You may see some quick growth, but how well organized you are and how well you execute really takes some time. That's what we found out in Europe.

You go from country to country, some places we executed better. In countries like China and Brazil, we put factories there, as we're very careful to make sure we're getting our infrastructure in place.

You cut your growth rate to 30 percent earlier this year, signaling the boom times are over. Are you concerned about that?
If you look at the total growth, yeah, the growth rate has slowed somewhat. But we're also going to have $30 billion this year (in revenue). Even what the analysts project us to do, we'll have about $8 billion in organic, in-year growth.

On a percentage basis, while that is slower than it's been in other years, it's still more dollars. And the company still has a lot of opportunity. Right now we have about 11 percent market share worldwide. When I look at the penetration into new markets, I say it's fairly optimistic. I don't think it's realistic (we'll) grow 50 percent again.

There is a lot of concern now about the longevity of the PC market. What is Dell's take on this?
If I look at what some of the industry analysts say about the industry, some have growth over the next couple of quarters in the mid- to upper teens. So while we're seeing a lot of other devices coming out, we're still seeing good PC demand.

Still, the market is changing as PCs become less profitable. How do you plan to shift your business to accommodate these changes?
Our desktop business makes a lot of money, and we believe we are a lot more profitable than anybody else. That business is still good and growing. We're especially seeing strong growth in portables, and that growth the last quarter year over year was in the 60 percent kind of range. Our mix is shifting to those kinds of products and the enterprise products. Half our products now aren't desktops.

Other companies have had to lower the average selling prices to remain competitive. Dell appears more immune to that. Why?
Actually, we've consistently been the pricing leader. We've been able to do that because we are fixated on keeping our cost lower than anybody else in the industry...If we're the lowest price out there, and we're still making money, what does that say about the cost?

So how has this focus on managing costs helped Dell's business?
To gain credibility in new markets, we have come at it through undercutting the cost. We don't feel we need to make the same kind of margins as other people do to be successful. We can balance our priorities.

Even when I was younger in the company, going back three years, I looked at notebooks. The notebook at the time had much higher gross margins than the desktop, but also more dollars because notebooks cost more. So we started talking, "Gee, why should we not bring the pricing down?" If we could sell twice as many notebooks, drop the margin by 50 percent, I'd still have 50 percent more profit.

It's not so much you need the profit on a percentage basis but in real dollars.

You talk about cutting cost, but where does the profit come from? If you look at Gateway, 50 percent of its income comes from non-hardware sales, software and services.
It's tough to compare ourselves with Gateway in that respect, because they're more of a consumer company. We don't just break out all this and disclose it, but when I look at some of the numbers from our small-business units, I don't find them totally dissimilar to what Gateway talks about.

What we have reported publicly, in the last quarter we had $1.3 billion, or about 17 percent of our revenue, outside the box. Again, that is a lot more profitable than what the box sells for.

I want to sell more services as well. But I think to have a healthy margin on box as well is still very important to us.