Dell Warns of Sharply Lower Quarterly Results
Dell Computer Corp., the biggest seller of personal computers in the U.S., warned Wednesday that its fourth-quarter sales and profit will fall far short of expectations, triggering concerns that computer stocks could slide today on worries there could be an industrywide slowdown in sales.
Dell said that for its fiscal fourth quarter, which ends Friday, it now expects a profit of $430 million, or 16 cents a share, up from 15 cents a year earlier. Most analysts had been expecting a profit of 21 cents a share for the quarter.
Dell said it expects its revenue to grow in the “low-30% range” in the new fiscal year. Coming from Dell, whose sales have jumped as much as 50% a year since 1996, the warning sent a shudder through the investment community as analysts scurried to lower their estimates for industrywide computer sales for 2000.
Dell shares sank $1.75 to $40.38 in regular Nasdaq trading before the news, then slid $2.25 to $38.13 in after-hours activity. The stock today is no higher than it was a year ago, despite several brief rallies in 1999.
Other computer stocks will be hit today, analysts warned.
“Dell is a pure-play indicator of the health of the commercial market,” said analyst Ashok Kumar of U.S. Bancorp. “We expect a recalibration [of other PC makers]. Most of these stocks are under tremendous pressure.”
Dell said it revised its fourth-quarter estimates because corporate buying failed to rebound after the New Year and because of a shortage of computer chips.
PC rival Compaq Computer’s shares also fell on Wednesday, a day after it projected sales-growth of 15% this year. The company’s sales rose 24% in 1999. Compaq, which is the largest personal computer maker worldwide, saw its stock slide $28.88 by late Wednesday, down 7% for the day. Dell, which is based in Austin, Texas, said that its revenue for January, a month that typically sees an increase of about 9% from December, declined and that sales for February also look weak.
“We don’t think we correctly understood the impact [worries about the year 2000 computer bug] would have on our business,” Chief Executive Michael Dell told analysts in a conference call. The company said the Y2K buying slowdown and lack of a bounce-back this month cost it $500 million in fourth-quarter sales.
“January [sales] fell off the cliff,” U.S. Bancorp’s Kumar said. “Is that an indicator or a short-term problem coming after Y2K? I wish I knew.”
But analyst Roger Kay of International Data Corp. said, “We’re in the period of slowing growth for computer companies.”
Kay said IDC may now reduce its current projection for 16.7% growth in U.S. personal computer sales industrywide for 2000, which was already down from the 25% increase for 1999. After this year, IDC expects U.S. unit growth to fall below 10% annually.
Dell is expected to post sales of about $25 billion for its fiscal year that ends Friday.
“We are establishing a lower goal [for longer term sales-growth], and many of you are going to be disappointed,” Dell Chief Financial Officer Tom Meredith said. “We’re trying to grow a $25-billion business, and trying to do that at a 40% [annual growth] clip provides little room for error.”
Dell also blamed a shortage of computer chips for its sales slowdown. The company had committed heavily to new chip technology from Intel Corp., then was hurt badly when the chip’s roll-out was delayed after problems were discovered. That cost Dell about $300 million in lost sales for the fourth quarter.
But Michael Dell brushed off suggestions that the company might begin buying microprocessors from Intel’s competitors, as computer rival Gateway recently did.
“You’re not going to see us change our approach to partnering based on one difficult transition,” he said.
Dell and its rivals hope to increase sales by offering new, less complicated computers and by pushing Microsoft’s latest operating system, Windows 2000. But that business-oriented software, due out next month, will probably increase sales to businesses only gradually, analysts said.
But Meredith said he is still “confident” the spending increase will come now that businesses aren’t worried about the Y2K glitch.
However, some analysts weren’t convinced.
“At various moments, people have cited Y2K as a reason for a variety of unpleasant surprises,” IDC’s Kay said. “I believe most of that is true, but maybe there are other things wrapped up in that as well. Companies are going to have to start blaming something else.”
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Slowing Growth
Dell Computer warned Wednesday that sales growth in its new fiscal year will be in the “low-30% range,” much lower than in recent years. How Dell’s annual sales have grown each year:
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Source: Dell Computer
