Beyond the Battery Mess

In an article three weeks ago ("How to Fix a Busted Icon," Aug. 7), Barron's prescribed remedial steps for Dell and concluded that the stock could be an intriguing speculation, albeit a very risky one. To assess the situation further, we traveled to the company's Round Rock, Texas, headquarters and met with Michael Dell, founder and chairman, and Kevin Rollins, CEO. It was their first extended interview since the battery debacle. Excerpts follow:

Barron's: There's been a flood of negative comments about Dell from Wall Street, and a sense that the company is in denial about its problems. How does all that make you feel?

Michael Dell: Am I happy? What do you think? But I don't think that dumping on the analysts really helps. And I certainly don't think there is any complacency here. Everyone is fully engaged addressing the challenges that confront us. Let's be clear -- we are making the investments we believe are needed, but, much as we would like these to show a return within 90 days, the payback will take longer.

Kevin Rollins: And, we don't run the company for analysts who look at things on a daily or quarterly basis. On the whole, I think we have been pretty open about admitting the various mistakes we have made.

There's been open speculation about tension between you two, even talk that Kevin may be fired. Some say that if you, Michael, took back the CEO job, it would be a clear sign of a turnaround. Your reaction?

Dell: I have said this before and I'll say it again: Kevin is an exceptional executive and it's totally wrong to blame everything on him. To do that is to totally misunderstand how the company operates. There's one thing I want to stress: We work together closely, our offices are near each other and we talk all the time. We actually do this together.

What's the outlook for revenues and margins to improve from these depressed levels?

Rollins: We are no longer forecasting our quarters, so I won't tell you or anyone else what we expect our revenues or earnings to be. However, I am very comfortable that the things we are doing will boost our revenue growth over time and improve margins over time. Dell has always been the most profitable company in the industry, and that's going to be true in the future.

Michael, haven't you been a regular seller of stock since your IPO in 1988?

Dell: Not recently. I have stopped selling. At this price, I'm buying! [He bought $70 million worth of Dell shares in May, according to InsiderScore. His company, meanwhile, has said it will buy back about $1 billion worth of shares this quarter.]

It looks like a big part of the problem is low consumer satisfaction. Some point to numbers from the Better Business Bureau showing complaints about Dell running at 16 times those for Hewlett-Packard. What's going on here?

Rollins: That Better Business Bureau data is flawed and inaccurate, as they have said in an open letter. If you look at the real numbers, yes, our customer satisfaction did come down from our previous high level, because we cut back there. But we never dropped below the industry average. The point here is that we are now reinvesting in service and it has already started to improve markedly.

Dell: Yes, our cost position did get out of whack and, yes, our customer support declined and wasn't up to snuff, and, yes, we did drive prices a bit too low. The problems were of our own making and we can't blame them on the market. But since November, we have been addressing these problems and we are starting to see the impact. It takes time for the full impact of improvements to show up in survey numbers.

Give us a sense of the service improvements that you're planning.

Rollins: Among other things, we are spending an extra $150 million to improve our U.S. customer call centers, raising the quality of our agents, reducing hold times, working to ensure the problem is solved on the first call and ensuring that callers are not transferred and re-transferred between experts.

Given your huge recall of Sony batteries in laptops, do you agree that cost cutting also affected your quality?

Rollins: Not at all. The batteries were a quality problem not at Dell but at our supplier. Sony (SNE) makes the battery cells and we assemble the battery packs to Sony specifications. We made a larger recall than we probably had to, because of our commitment to restore faith and confidence in the company. A point you might want to consider is that we used only 18% of Sony's battery output for the period. Where did the rest go? [Two days after the interview, Apple Computer (AAPL) recalled 1.8 million Sony batteries. Sony said it doesn't expect further recalls.]

There have been scattered reports of problems with spontaneous fires at the Dell servers sold to large corporate customers. Any truth to these?

Rollins: There can be a problem if the units are not properly ventilated. Could we have, have we had, a server overheat, yes. But there is absolutely no systematic server problem.

The maturity and slow growth of the U.S. PC market must be a huge challenge for Dell. Where might your growth come from in the future?

Rollins: Our second quarter was an indication. Although global growth has slowed from 18% a year ago to around 9% now, there are still pockets of very good growth. Asia is growing very nicely, for example, and we continue to take market share there, moving into a No. 2 position behind Lenovo. There's tremendous opportunity.

There's been concern that your direct-sales model won't work well in developing countries, that customers will prefer to buy in person from a salesman. Are you rethinking the model?

Rollins: No we are not, and for good reason. I simply don't understand how people can question our direct model, because all the evidence, all the data, shows that it is working perfectly. We are growing faster than the industry in all these markets, increasing sales over 80% in India and the high-30% range in China. In Japan, where the market declined 2%, we grew 14%. We are growing in international markets faster than in the U.S. We are taking share, we are moving up. Why on earth would we want to change our model?

Are you considering a greater retail presence in the U.S.?

Rollins: No, we are not, for two good reasons. The first is that as things are now, we are again gaining market share in the U.S. and winning with the model we have. So why change it? The second reason is that our focus has always been and will always be on corporate sales, which account for maybe 80% of our business, compared with 20% to consumers. Corporations don't buy at retail.

Does Dell have to change its approach to pricing? Wasn't part of the problem that Dell drove prices down too far to boost market share?

Rollins: Given what happened to margins, I think it is fair to argue that prices did go down too far too fast, at least in relation to costs. We are very large in the U.S. consumer space, and I think we have to come to terms with the fact that this is going to be a slower- growing market. Can we do better at managing sales, prices and margins? Certainly. And we are doing that.

Unlike Apple PCs, which really look different and sleek, nearly all desktop PCs running Microsoft Windows, including Dell's, look like boring boxes. Why not put some effort into design?

Dell: I don't think you can say we haven't put any effort into it. That's just totally wrong. We are putting effort in here and we have won design awards. Our new XPS M2010 laptop is a case to point, with a swiveling screen and detachable keyboard.

Your R&D people have shown me a slew of possible desktop PC concepts, including some shoebox-size units that could sit under a monitor. Will these come to be?

Rollins: We are working on them, and they might or might not happen. The point you must remember is that 80% of our business is corporate, and corporations don't buy on design.

Let's talk some more about the corporate side. Some say customer satisfaction has been on the decline there, too -- that Dell's edge of low price isn't enough anymore. Do you agree?

Dell: I don't think that corporate satisfaction has declined anywhere near what we are talking about on the consumer side. If you look at our ratings and rankings, it's superb. Can we do better? Always. Are we making improvements? Yes. And, as a result, we are seeing our repurchase rates [sales to existing customers] tick up.

Rollins: I would challenge the idea that Dell was always the low-price leader in corporate sales. We can be the low-price leader, but we know that corporations don't buy based on a flip in pricing. We are larger in our segments of corporate space than our next three competitors combined, and in some areas we are growing at 50% annually. You don't do that by providing bad service.

Taking everything together, would you say Dell is still a great company?

Rollins: Yes, it is. We are the leader in our business in the U.S. and worldwide in sales, and we are the leader in terms of ability to generate profits, as well. Historically, Dell used to generate between 100% and 150% of the profit in this business. Today, we do perhaps 60%, which isn't bad.

Dell: How can anyone looking at those numbers ever begin to say Dell isn't a great company? The people who do may be well-meaning, but they're wrongheaded in terms of what they are thinking about. We have to prove them wrong through our performance in the future. That's the way the world works.

OK, gents. Thanks.