Companies That Need to Cut Jobs: Dell

As part of an ongoing look at companies that could announce workforce reductions in the near future, Dell (DELL) is a name that comes up over and over.  The end result is going to be more than mere layoffs as there are entire locations and groups that are likely under review. 

For years Dell exceeded analyst estimates for revenue growth, making consistent market-share gains along the way.  Older shareholders are not accustomed to “the current Dell.”  Dell almost single-handedly put Gateway (GTW) out of business a few years back, and took away the lead from chief rival Hewlett-Packard (HPQ).  That was then.  HP had revenue per employee (implied, because of acquisitions and job cuts) of just over $600,000 during 2006, but Dell can and should perform much more efficiently given their lack of retail presence in a mostly-hardware and peripherals model. 

Revenue per employee is implied at below $800,000 in the past year, but until its filings are current the true number is harder to peg.  These levels have not been seen since the last time Dell made sweeping job cuts in 2001.  Long-term averages at Dell are closer to $900,000 per employee, but the last year has seen stunted PC growth, delays in Vista that delayed PC buying, some manufacturing issues, and heated up competition that was able to borrow much of the Dell model in newer ways. Dell is now in the rare position of looking bloated.  The growth train has been out of the station for quite a long time, and the wear is starting to show.  Sales and market share gaps are now largely closed, as HP is now #1 in sales, Gateway still breathes, and foreign manufacturers have copied and modified Dell’s playbook quite well.

Meanwhile Dell has expanded into its own flat-panel monitors, televisions, projectors, and printers, much of which have their growth mainly determined by how well they sell computers.   These other products are actually not established brands yet and instead sell mainly through the company website.  The company even had to basically bow out of the MP3 player market.  It is now also doing more in servers and storage.

Dell’s large workforce increase in 2006 stands out in the face of flat sales growth.  Much of it went towards customer-service reps – which were badly needed – but somewhere Dell badly overshot the target.  It is often estimated that Dell’s cuts may be in the range of 15,000 to 20,000.  Will the Dell of the future will be looking more like a service and support-oriented company?  Will they look to leverage their business and consumer relationships into more recurring revenue?  If this is the case, then we can no longer think of them as the lean, mean supply chain leader, and the stock may face more pressure.  Much of this is up to how Michael Dell communicates and enacts whatever the coming restructuring plan will be.

With the rain clouds (late on filings, SEC accounting probe, potential Intel payments or credits) still covering the company, any good news will lack the punch it could have in a normal environment – something Michael Dell understands as well as anybody.  So Dell may wait until their filing requirements are met and all the accounting probes are completed before implementing any major workforce reductions or major restructurings.  But don’t be surprised if there is a flurry of news in the upcoming quarter as regulatory issues become resolved, which depending on economic trends could be a boost for the stock. 

Slow and steady adoption of Microsoft Vista could help push sales growth, but trimming some newly-acquired fat could contribute to the bottom-line.  The company has also shown that international unit shipments have exceeded US shipments, so many of the “coming changes” may affect more US workers than international workers.  There is also a perception that Dell needs to retune its advertising efforts, and if you have seen their mail catalogues you know those aren’t cheap.  This may not be in a job-cut scenario, but further redirecting advertising may be part of a restructuring.  It will be good to see how its Alienware unit is doing since it acquired Alienware early last year.  Will its newly announced $336 PC in China be that profitable?

The company has already telegraphed a loose plan: strengthen its management team, unify business units, and eliminate redundancies, while redeploying resources to drive greater value for customers.  All of that is “corp-speak” for cutting jobs, combining units, and focusing on money-making and money-saving initiatives.  2006 bonuses were dropped.  In February it brought in Michael Cannon (out of Solectron) as President of Global Operations and brought in Ron Garriques (out of Motorola) as President of its Global Consumer unit.  Both of these men know how to implement and run workforces on a lower headcount and a faster environment.  Michael Dell also knows how to do this.

Written by Ryan Barnes, edited by Jon C. Ogg
March 27, 2007