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Dell CFO sees upturn for PCs

Demand for newer, faster PCs is growing among corporate customers, but it's tough to say when that will mean new sales, says Dell Computer's chief financial officer.

Demand for newer, faster PCs is growing among corporate customers, but it remains difficult to predict exactly when that will translate to new sales, according to Jim Schneider, Dell Computer's chief financial officer.

"There is a fair amount of pent-up demand," Schneider told an audience at the Banc of America Securities Technology Conference in San Francisco. "Whether that (upgrade cycle) happens in the second quarter or second half" is unknown.

Whether or when a new upgrade cycle will occur is one of the major questions for the hardware industry in 2002. The last major upgrade cycle occurred from late 1998 through early 1999. Thirty percent of desktops and 25 percent of laptops in use today at businesses, for instance, are three or more years old, Schneider noted.

Typically, companies replace their PCs every three years, so a new cycle should be commencing right now. The release of Windows XP, chips racing at more than 2GHz, and super-cheap memory prices have also been seen as incentives to upgrade.

Customers, however, are holding onto PCs slightly longer than in the past, according to some analysts and executives. The economic environment has also curbed technology spending. Computer sales actually exceeded most estimates in the fourth quarter, but the unexpected pop came from consumer purchasing.

Dell, which will close its fourth quarter Friday, expects to report revenue of $8 billion, $400 million more than earlier estimates.

"People have made do for some time already" with existing computers, Schneider said. "Most of the upside (in the current quarter) was due to our consumer business. Business has been soft. We need some turnaround in those markets."

In any event, Schneider asserted, Dell will be prepared to capitalize on the opportunity when it arises. Despite the worldwide recession, Dell is "right now at the strongest point we have been in our history," he said.

Dell grew nearly 21 percent faster than the rest of the industry in the company's third quarter of 2002, which ended last October, Schneider noted. Dell grew by 8 percent, and the rest of the industry declined by 13 percent. Historically, the company has grown 10 percent to 15 percent faster.

The acceleration occurred approximately a year ago, when the company decided to sacrifice gross margins to gain market share. A year ago at this time, when the price cuts first started to take effect, Dell grew 35 percent faster than the industry as a whole.

"On a unit basis, we are about twice as big as our nearest competitor in the U.S," Schneider said. International sales are also on the rise, with Dell gaining market share in Europe, Asia and Japan over the past year.

Still, while it is cutting prices, Dell has also managed to reduce its internal costs. The company has reduced the length of time it holds inventory to a record low four days, he said.

"There's been a lot of talk about a price war, but to us it was more of a cost war," Schneider said.