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Dell Shares Plunge After Report

Times Staff Writer

Dell Inc. shares tumbled nearly 10% on Friday after the world’s largest personal computer maker warned shareholders that second-quarter profit and revenue would fall well short of Wall Street expectations because of cutthroat price competition.

It was Dell’s biggest decline in six years, underscoring how badly the company is under siege from archrival Hewlett-Packard Co., Gateway Inc. and other competitors.

Speaking at Dell’s annual meeting in Austin, Texas, Chief Executive Kevin Rollins said that the company’s rivals “are willing to operate their business at low/no profit in order to win.”

That aggressive pricing, Rollins said, means Dell will post a quarterly profit of 21 cents to 23 cents a share on $14 billion in revenue.

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Those revised earnings figures are more than 30% off from the 32 cents on $14.2 billion in revenue that Wall Street analysts polled by Thomson Financial had been predicting. Dell is to announce its second-quarter results Aug. 17.

“The size of the miss is considerable,” said Mark Lanyon, an analyst with equities research firm Morningstar Inc. in Chicago. “The old Dell trick of cutting prices to drive revenue doesn’t work.”

Dell shares lost $2.19, or 9.9%, to end trading Friday at $19.91. Shares of the Round Rock, Texas-based company are now trading at less than half of the $40 they were selling at one year ago.

Dell blamed weakness in the overall computer market, singling out slower sales to commercial customers such as corporations and government agencies.

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Known for selling directly to customers via telephone and the Internet, Dell built a low-price business by cutting out retail middlemen.

But rivals are aggressively undercutting Dell’s price advantage and gaining market share, while at the same time tightening their own belts.

“The PC marketplace continues to be very price competitive, clearly led by HP and others throughout the world,” said Nick Nilarp, an analyst with Fitch Ratings in New York.

“We’ve seen Acer and Lenovo gain market share and continue to be very price competitive in Asian and European markets,” he said.

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Analyst Richard Farmer of Merrill Lynch & Co. noted Friday in a report to investment clients that Dell has said it intends to price aggressively in upcoming quarters in certain sectors.

“Given the miss in the second quarter, it does not seem that these pricing actions are helping Dell reaccelerate its revenue growth,” Farmer said.

Prices aren’t Dell’s only problem. Citing Better Business Bureau information, Cindy Shaw, an analyst with Moors & Cabot Inc. in San Francisco, wrote Friday that the company has fallen well behind its competitors in customer satisfaction.

“We are reducing estimates and our price target to reflect increasing concern about Dell’s customer experience challenges and ability to succeed given current market trends,” Shaw said.

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Dell promised it would invest in upgrading customer service. It also plans to simplify its promotions and rebate programs.

“We think the actions we’re taking today, such as investing in our product line, are good for our customers today and will maximize shareholder value over the long term,” Dell spokesman Bob Pearson said.

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Bloomberg News was used in compiling this report.

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