Dell CFO sees hardware upgrades boosting profitability

AUSTIN, Texas Tue Jul 14, 2009 10:53pm EDT

AUSTIN, Texas (Reuters) - Dell's DELL.O finance chief expects strong corporate IT hardware upgrades starting from the middle of next year at the earliest to boost profitability for the No. 2 PC maker.

In an interview with Reuters on Tuesday, Brian Gladden stressed the difficulty of trying to predict when the so-called corporate replacement cycle will truly resume, given the uncertainty around the economy and demand.

Companies have put off upgrading aging equipment for multiple quarters, he said, adding that the upcoming release of Microsoft's (MSFT.O) Windows 7 operating system will play a role in the refresh, but not the driving factor.

"When it does happen, our financials will get better quickly and we'll show improved profitability for some period of time," Gladden said in Austin on the sidelines of an annual meeting with investors and analysts.

"Only 30 percent of our commercial customers have moved to Vista... If there's confidence and lots of good feedback on Windows 7 and its performance, then next year most people will say, 'let's use this refresh as a chance to get to Windows 7'."

Asked about the Chrome operating system that Google (GOOG.O) plans to launch next year to challenge Microsoft, Gladden said the company is always studying new products.

"Anything that brings competition for Microsoft is good for us," he said. "Too much of the profit in our industry sits in Microsoft's pockets."

On Monday, Dell forecast lower gross margins in the July quarter due to higher component costs, intense price-based competition and an unfavorable product mix.

Gladden said the U.S. PC maker's retail business -- with its low-margin hardware -- is growing, even as the enterprise part shrinks, pressuring margins.

He noted that overall component costs are still falling but the pace of decline for parts such as liquid crystal display panels and memory was not at the same rate as items such as processors and drives.

TARGETS

Dell, which has openly declared it's on the prowl for acquisitions, was asked a number of times at this week's analyst meeting about possible targets, but the company declined to provide any hints.

Going forward, Gladden said the company is putting in place a system to make better use of acquisitions, aided by new hire David Johnson, IBM's (IBM.N) former head of M&A.

"You will see us become more of an acquisitive company that has a process in place to regularly acquire assets... That's got to become one of the tools for us."

Analysts brought up the topic of smartphones -- and Dell's making them -- several times this week, though the company declined to provide more detail than it has before.

Gladden said consumer president Ron Garriques "has a very clear vision that handsets should be a part of his business, we continue to look at opportunities there."

He said the company does not necessarily need to come up with differentiated product to generate a reasonable return on a modest investment in the smartphone space.

When asked about the company's exposure to troubled lender CIT, Gladden said it was "manageable" and "not material."

He said Dell had a $35 million direct receivable from CIT, and that the lender is a funding source for some of its U.S. financing, which Gladden put at around $100 million a quarter.

CIT also provides financing for Dell in six different countries.

(Editing by Edwin Chan and Anshuman Daga)

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