Dell says revenue to fall short

Thursday, October 5th 2000, 12:00 am
By: News On 6

Third-quarter numbers may miss target by 3%

AUSTIN – Dell Computer Corp. joined the growing chorus of bad news from the personal computer industry, warning investors Wednesday that sales are lagging expectations due to weak demand in Europe and from small businesses.

Dell executives told analysts gathered in Austin for the company's regular fall meeting that revenue in the fiscal third quarter ending this month will be about 3 percent below the company's expectations.

"Obviously, that was not the way we wanted to start the meeting," said Michael Dell, chairman and chief executive. But Mr. Dell added that he remains confident in both the short- and long-term prospects for the company, even in light of the announcement.

If the softness persists in the fourth quarter, the company said, it expects revenue for its full fiscal year ending in January of $32 billion. That would be a 27 percent increase from the prior year, well below Dell's historically torrid growth rates and shy of the 30 percent the company had expected.

The news was released after the market close.

Dell shares tumbled to $25.75 in after-hours trading. At the close of regular trading, shares were off 38 cents to $28.19. Dell, based in Round Rock, Texas, was one of the great growth stocks of the last decade. As recently as March, before pessimism set in for many tech stocks, it traded at nearly $60 a share.

Analysts said Dell's disclosure is further evidence that growth in the PC industry overall is slowing. In recent weeks, Intel Corp., the giant chipmaker, as well as Apple Computer Inc., have warned of sluggishness.

"Clearly, industry growth is not putting the wind behind anybody's back," said Walter Winnitzki, an analyst with Chase H&Q.

Andrew Neff, an analyst with Bear Stearns & Co., said the industry needs to come to grips with what appears to be weak demand, after a sustained period of struggling to provide enough supply.

The main culprit appears to be the weak euro. Europeans have been significantly less inclined to make major capital purchases in technology as their currency has declined, Mr. Dell said.

Much of the problem with small businesses appears to be concentrated at customers, which have slowed their purchases of high-end servers for their Web sites, said Kevin Rollins, Dell's vice chairman.

Another challenge may be that Dell's rivals are getting stronger. Asked about whether Compaq Computer Corp. was a more formidable competitor, Dell officials said they would need to wait and see the Houston-based company's results.

But Mr. Dell said he still expects Dell to surpass Compaq next year to become the world's leading PC vendor.

Dell expects industry growth over the next several years of between 14 percent and 16 percent. Mr. Dell said he expects the company to grow at 1.5 to 2.5 times the industry rate.

"The question is not whether Dell will continue to grow, but at what multiple will it grow relative to the industry," Mr. Dell said.

The good news about demand, Mr. Dell said, is that corporate purchasing remains robust. He cited a survey showing 78 percent of chief information officers in the Fortune 500 expect to spend more on technology in the next year.

The Asian market is also strong, Mr. Dell said.

Moreover, Mr. Dell said, component prices have been falling, particularly memory chips and flat-panel screens used largely in notebook models.

As a result, the company said, it expects to meet profit expectations for the fiscal third quarter, although fourth-quarter earnings could be 1 to 2 cents below the company's targets.

The average First Call estimate for earnings for the current quarter is 25 cents, compared with 18 cents in the year-earlier quarter. The average estimate for the fourth quarter is 28 cents, compared with 15 cents in the corresponding period.

Mr. Dell noted that comparative data are affected by an increase in spending last year to stave off the Y2K computer bug.

Mr. Dell said the company is considering several ways to invest its cash, including share repurchases, acquisitions or investments in start-ups.

Over the next five years, Mr. Dell said, the company will benefit from increased demand for mobile wireless products, which sell for higher prices and are replaced more often.

But company officials said they believe that desktop PCs will remain a major part of the business for some time to come.

"The PC was supposed to be dead 350 million units ago," Mr. Dell said. "It doesn't appear to be dead."