PC War's Latest Victim : Dell Computer Expects Its First Loss as the Industry Undergoes a Shakeout

By AMY HARMON

July 15, 1993 12 AM PT

TIMES STAFF WRITER

There was more bloodshed Wednesday in the personal computer wars: Dell Computer Corp., one of America’s fastest-growing companies, warned of its first-ever quarterly loss and a possible default on a line of credit.

The unexpected announcement sent Dell’s shares plunging nearly 20% in NASDAQ trading. But it also signals the extent to which cutthroat competition and relentless price cutting are taking their toll in the personal computer industry, even on major players. In 1992, Austin, Tex.-based Dell was the fifth-largest PC company by market share.

Indeed, as the early powers of the personal computer industry fight to regain market share seized by the proliferation of small, low-margin clone vendors over the last decade, the industry has plunged headlong into a major shakeout. Oddly, the upheaval will leave the PC business looking more like it did several years ago--with a few key players controlling the market.

“We’re seeing mergers and consolidation and we’re seeing companies that were high-flying hit the skids,” said Robert Corpuz, an analyst at Dataquest, the San Jose-based consulting firm.

Compaq Computer fired the first volley in the recent price war in the spring of 1992, slashing prices nearly 35% on some models. IBM, Apple and Dell were forced to follow suit. Subsequent cuts have halved the price of the average personal computer in a mere 18 months.

Dell’s is the latest in a series of announcements that portray an industry desperately realigning itself as companies scramble for a way to stay alive. Other moves include:

* AST Research’s acquisition of Tandy Corp.’s computer manufacturing operations, a deal that closed Wednesday. AST, which makes desktop and notebook computers, said it may report quarterly and annual losses as a result of a pretax charge of up to $125 million for the purchase.

* Packard Bell’s alliance with France’s Groupe Bull, whose U.S. subsidiary Zenith Data Systems has had trouble competing against lower-cost producers Compaq and IBM.

* Among the smaller firms, Compuadd and Everex have filed for Chapter 11 bankruptcy protection. Hyundai, which in October introduced 50 new products for the U.S. market, recently said it would limit its U.S. offerings to multimedia-based computers.

* Apple Computer, which said last month that it would cut 2,500 workers, Monday announced its third round of price cuts in as many months.

In such a tumultuous environment, analysts say, it’s hard to predict what it will take to prevail. While deep pockets help, bigger isn’t necessarily better. Companies such as Apple and Zenith are coping with shrinking profits as smaller firms such as AST and Gateway 2000 appear to have achieved a degree of equilibrium.

Dell is a case in point. A pioneer of direct marketing whose profit last year soared as sales more than doubled, it should have been well positioned to meet the intensifying competition. But at a time when margins are stretched thin, one false step, such as Dell’s failure to produce a competitive product for the exploding notebook-computer business, brings swift and brutal punishment from the marketplace.

Notebook computers, which weigh just a few pounds, are the fastest-growing segment of the PC industry.

To be sure, Dell is far from dead. The company said it does not expect its restructuring actions to result in major layoffs.

“I’m very sorry for the large hits we are taking on the bottom line,” said Chairman Michael S. Dell, who founded the company at age 19 in his University of Texas dormitory room. “But the overall tone of our business remains strong.”

In March, the company hired John K. Medica, who was responsible for the design of Apple’s successful PowerBook line of notebooks. Medica’s decision to scrap Dell’s plans for the market in favor of a fresh start accounts for part of the company’s expected second-quarter loss.

The rest of the pretax charges, which should total $75 million to $85 million, stem from a restructuring of operations.

Dell said the loss could trigger a “default of specific financial covenants in its revolving credit facility,” but Thomas J. Meredith, chief financial officer, said he is “confident” default can be averted.

Dell stock plunged $3.375 to $15.875 on Wednesday. In a research summary, Merrill Lynch said it thinks the outlook for the remainder of Dell’s year is “cloudy” and its balance sheet “precarious.”

A Speedster Stumbles

Until its warning Wednesday of a possible quarterly loss and credit default, Dell Computer Corp. was a remarkable American success story. Founded by a Texas college student, the company saw dizzying growth.

Results were impressive . . .

Revenue (in millions)

1992: $890

Profit (in millions)

1992: $50.9

. . . But investors got a rocky ride

Monthly closing prices, except latest

Wednesday close $15.86 down, $3.38

Dell-at-a-Glance

Headquarters: Austin, Tex.

Founded: May, 1984

Founder: Michael S. Dell, chairman; also largest stockholder, with 31%