Another Defection At Dell

Smack in the middle of a fierce price war, the last thing any company needs is to lose its top financial executive. Especially a highflier such as Dell Computer Corp., where tight controls have been a key to steady gains in sales and profits--even as many personal-computer rivals crash and burn. But with the abrupt resignation of Dell's chief financial officer on Sept. 14, Chief Executive Michael S. Dell is in serious need of a skilled co-pilot.

With the help of CFO James R. Daniel, Dell has proved remarkably adept at cutting costs and boosting profits, even as it dropped prices--by 30% this year alone. Indeed, in its latest quarter, ended Aug. 2., Dell's sales rose 129% from the year-ago quarter, to $457.5 million. Profits nearly doubled, to $21.9 million. Meanwhile, operating costs fell to a record-low 16% of sales for the quarter, compared with 24% in the previous year, thanks to stringent cost-cutting, including 5% pay cuts for Dell's 100 highest-paid executives and the elimination of 50 positions. Few of Dell's price-cutting rivals have done as well. Northgate Computer Corp., for example, reported a second-quarter loss of $10.2 million, after sales fell 22% to $34.7 million.

Daniel insists his departure after two years at Dell is not the result of a rift between him and Michael Dell and that he simply wanted a change. But, uncomfortably for Dell, Daniel's resignation comes on the heels of another high-level departure. John C. Olson left Dell in August, after serving just four months as vice-president of worldwide manufacturing operations, a new position. Olson says he left to care for an ailing wife.

TIGHT REINS. The departures come at a time when Dell could use an experienced hand at the financial controls. IBM, Compaq, and Apple all have inexpensive new personal computers aimed at Dell's market. And Dell's profit margins are under severe pressure. In its latest quarter, margins slipped to 4.8%, below Dell's usual 6% or so. Worse yet, says Jim Poyner, an analyst with Rauscher Pierce Refsnes Inc. in Dallas, Dell's second-quarter net income grew just $2.3 million over first-quarter net on a sales gain of $91.4 million. That means the price war is cutting Dell's net profit margin on incremental sales to 2.5%. "There's no way you can construe Daniel's leaving as a positive," says Poyner. "The margin issues are acute right now, and it takes very tight controls to continue to grow earnings."

Daniel gets credit among his peers for doing just that. When he joined Dell in 1990, the PC maker had little more than $5 million in profits on sales of $388 million. This fiscal year, Chicago Corp. analyst Rick J. Martin expects Dell to earn $92 million on sales of $1.9 billion. Daniel also spearheaded a successful public offering in April, 1991, that raised $106.7 million. Dell has $122 million in cash, compared with $8.8 million when Daniel came on board. Says Martin: "Jim leaves the company in good shape."

Despite the empty seats in his executive offices, Michael Dell remains unflappable. He argues that the missing executives won't hurt the company, since those duties also are performed by executives in the international and U.S. divisions. "I don't think you're going to see us miss a beat," he says.

Besides, Dell adds, Daniel's resignation gives him the chance to hire a CFO experienced in running larger companies. Before coming to Dell, Daniel had worked at SCI Systems Inc., a $1 billion electronics manufacturer in Huntsville, Ala. "We want somebody who can take us to the $5 billion and $10 billion mark," says Dell. He will also need somebody who knows how to play in a price war without losing the company's shirt.