Dell's return as CEO comes as the company founder works to regain the trust of Dell customers, whose satisfaction with its products and services has dropped, while also offering reassurance to Wall Street. TBR believes Michael Dell has the confidence of the company's various constituents, including its customers and employees, and can effect change. CEO Dell himself appears to be willing to risk both his personal and professional reputation should he fail to enact a relatively speedy turnaround.

TBR believes Dell will respond to its current situation by offering customers new products that combine its hardware with software and services in bundles that offer customers greater value than standalone hardware. For consumers, that could mean automatic data backup and the ability to transfer personal settings and populate a new machine with their data. For businesses, Dell could offer its servers and storage systems with improved base-level management tools, as well as basic installation and maintenance services in one package.

While TBR agrees further action needs to be taken following its slower-than-expected 4Q06, we believe CEO Dell faces a daunting task in shifting his company's focus from a low-price PC hardware model to a more profitable software- and services-oriented strategy that harnesses the strength of its direct model. They believe efforts to craft new product bundles for corporations and consumers will take time and require investment. During the next four quarters, TBR expects the company to expand its third-party alliances and make several acquisitions, most likely of smaller services or systems software companies that allow it to target specific customers' needs. They also anticipate Dell will increase its research and development spending over the same period.

In the interim, Dell will remain heavily exposed to price competition with the likes of HP. Dell also has a high level of exposure to the PC market's most turbulent segment at the moment, desktop PCs. Meanwhile, the company is not participating fully in some of the stronger areas, including the current red hot U.S. retail market for notebook PCs.

While Dell's direct strategy has served it well in the past, TBR believes it was one of several reasons the company was unable to offset its 4Q06 desktop unit shipment decline with a significant gain in notebook shipments. Thus, Dell's U.S. desktop PC business was the primary cause of its 4Q06 revenue decline, due to competition and its own internal problems. The company's desktop unit shipments fell 18% year-to-year, while its notebook shipments increased only 2%. HP, on the other hand, increased desktop unit shipments by 3% in 4Q06, while upping its notebook unit shipments 57% year-to-year. Overall, TBR estimates Dell's unit shipments were down 9.5% year-to-year to 9.1 million.