Dell plans AMD servers; Q1 profit falls

In a surprise move, Dell on Thursday announced it will use Opteron processors from Advanced Micro Devices (AMD) in its high-end, multiprocessor servers by the end of the year.

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

After cutting prices on its PCs in an attempt to regain market share from competitor Hewlett-Packard, Dell Thursday reported net income of $762 million for its fiscal first-quarter 2007, falling short of its $934 million profit for that same quarter last year.

Dell posted earnings of $0.33 per share on revenue of $14.2 billion for the quarter ending May 5, down from $0.37 per share on $13.4 billion last year.

The report matched analyst forecasts of $0.33 per share on revenue of $14.21 billion from Thomson Financial. But analysts saw little mystery in the prediction; Dell had warned last week that it would miss its original forecast of $0.36 to $0.38 per share, on revenue of $14.2 billion to $14.6 billion.

Dell, in Round Rock, Texas, said it drew profit from increased sales of servers, storage and foreign markets. Compared to this quarter last year, the company’s sales outside the U.S. grew 12 percent, generating 44 percent of Dell’s 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 Chief Executive Officer 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, 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.

“Dell’s shaking it up with the AMD partnership. This is a strong strategic move for Dell who has been constantly struggling to meet growth expectations,” said Nicole D’Onofrio, an industry analyst with Current Analysis

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, she said.

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’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 to 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 percent market share in the first quarter of 2006, compared to 16.4 percent for its closest rival, Hewlett-Packard (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 percent in China, 40 percent in India, 54 percent in Korea and 74 percent in Brazil. That compares to just 18 percent growth in Europe, Middle East and Africa (EMEA).

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.”

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