Update: Dell plans AMD servers; Q1 profit falls

It's planning to use Opteron chips in high-end, multiprocessor servers by year's end

In a surprise move, Dell Inc. today announced that it will use Opteron processors from Advanced Micro Devices Inc. in its high-end, multiprocessor servers by the end of the year.

The news came as Dell announced disappointing earnings for its first quarter of fiscal 2007. Until now, Dell has used chips only from AMD rival Intel Corp.

After cutting prices on its PCs in an attempt to regain market share from competitor Hewlett-Packard Co., Dell today reported net income of $762 million for the quarter, falling short of the $934 million profit it posted in the same quarter last year.

Dell posted earnings of 33 cents per share on revenue of $14.2 billion for the quarter that ended May 5, down from 37 cents per share on $13.4 billion last year.

The report matched the consensus forecast of 33 cents per share on revenue of $14.21 billion from analysts polled by Thomson Financial. But analysts saw little mystery in Dell's performance; the company had warned last week that it would miss its original forecast of 36 cents to 38 cents per share on revenue of between $14.2 billion and $14.6 billion.

Dell said it drew profit from increased sales of servers and storage products, as well as increased sales in foreign markets. Compared to the same quarter last year, the company's sales outside the U.S. grew 12%, generating 44% of its overall revenue.

Dell got into trouble this quarter because it tried to increase both growth and profitability at the same time, allowing its competitors to gain an advantage, company executives said in a conference call with investors.

"The competitive environment has been more intense than we had planned for or understood," said CEO Kevin Rollins. "The industry is going through significant change in the short term and certain consolidation in the long term."

To survive those changes, Dell will spend $100 million to improve customer service by hiring 2,000 sales and support workers and opening or expanding call centers in Oklahoma City, Nashville, Ottawa and Manila.

And the company will finally start selling servers powered by AMD processors. Dell had been the largest computer vendor to use only Intel chips in its computers, but the company softened that position in March when it acquired Alienware Corp., a manufacturer of high-end gaming PCs running on both Intel and AMD chips.

Now Dell will bulk up its enterprise server line by offering customers a choice between Intel's new Woodcrest chip and AMD's Opteron by the end of 2006.

Analyst Charles King, of Hayward, Calif.-based Pund-IT Inc., said Dell's inclusion of AMD chips is "about damned time."

"It's been clear that given the success of AMD, of Opteron, that business computing users want choice," he said. "They're not ready for a world where Intel is inside everything. I think, to its credit, AMD more or less single-handedly launched the 64-bit on x86 revolution, and it has not rested on its laurels."

Dell had been "the only Tier 1 server vendor out there that wasn't using AMD chips," he said. "That had to hurt them in some deals. I think that as an IT vendor, it's a mistake to let your customers have an excuse to talk with your competitors."

What Dell found, he said, is that many customers were choosing applications that run well on AMD chips, giving competitors an advantage in selling AMD-equipped servers to those users. "You really need to listen to customers and give them what they want," King said. "I think that with the adoption of Opteron, Dell should be able to do just that."

Nathan Brookwood, an analyst at Insight64 in Saratoga, Calif., said Dell finally realized that it could no longer look away from AMD's tremendous traction in the server marketplace. "Intel has good answers in the pipeline, but Intel is still going to be struggling to match AMD's performance in four-way configurations," Brookwood said.

"Dell concluded that [it] couldn't walk away from that business anymore," even though the four-way market is only 10% to 15% of the boxes being sold, he said. The reason is that four-way boxes -- while only amounting to about 10% to 15% of the units sold -- make up 20% to 25% of overall server revenue because of their additional content and higher prices, he said. "Dell is virtually not a player in that segment right now."

That can be reversed, Brookwood said, because Dell is a good marketer of its products and it has good customer relationships. "I think their customers haven't completely abandoned Dell. Every generation [of hardware], every cycle, is a battle for these guys."

One thing that will interesting to watch, he added, is whether the AMD-equipped Dell servers will be a"point product" for the company or if Dell expands the agreement later to include AMD chips in other computer product lines.

The news could also tip the scales in the battle between AMD and Intel, since Dell's new AMD partnership with servers could open doors for future production of AMD-based Dell notebooks and desktops, said Nicole D'Onofrio, an industry analyst at Current Analysis Inc.

In the meantime, Dell plans to release PCs later this year using Intel's new Core 2 Duo family of chips, using Merom chips for notebooks and Conroe chips for desktops and workstations.

Dell's decision also means it will gain some new competitors. By selling AMD processor-based servers, Dell must now compete with Sun Microsystems Inc.'s Galaxy servers for large enterprise business and Sun Fire servers for small and medium businesses.

"I don't know why they took so long to decide; we saw the advantages of this architecture three years ago," said Pradeep Parmar, product line marketing manager for the systems group at Sun.

Despite the challenges, Dell executives said the change would help the company continue its growth outside the U.S., particularly in China, India, Germany and Brazil, Rollins said.

Dell is still the world's largest PC vendor, with 18.1% market share in the first quarter of 2006, compared to 16.4% for its closest rival, HP, according to IDC. All other vendors are in single digits.

However, HP is closing fast. The company posted quarterly profit of $1.5 billion on Tuesday, beating analysts' forecasts and marking an increase from $1 billion in the previous year.

Dell hopes to stay on top by focusing on emerging markets. Its year-over-year quarterly revenue grew by 29% in China, 40% in India, 54% in Korea and 74% in Brazil. That compares to just 18% growth in Europe, Middle East and Africa.

Still, investors should not expect an immediate impact, Rollins warned. "This is not a one or two quarter play. We're driving for success over the next three to five years."

Todd R. Weiss, of Computerworld, contributed to this report.

Copyright © 2006 IDG Communications, Inc.

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