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Micron Electronics turns corner

The No. 3 PC maker bests analysts' expectations by reporting a larger-than-expected quarterly profit, due in part to strong server sales.

Micron Electronics bested analysts' expectations today when the No. 3 direct PC maker reported a larger-than-expected quarterly profit, due in part to strong server sales.

The personal computer manufacturer posted fourth-quarter net income of $16.2 million or 17 cents a share, compared with profits of $15 million or 16 cents a share reported for the like quarter a year ago.

Joel Kocher, Micron's CEO, said those results indicate that Micron has turned the corner on many of its problems, which he described as "self-inflicted." Micron Technology wins for losing Two quarters ago, Micron's PC prices were $300 to $400 higher than those of its competitors. Now, after relentless cost-cutting and a new marketing push, the company's products are competitive with the rest of the industry once again. Web sales at the company are up, he added, and component costs are stabilizing.

More importantly, Micron now can start to enjoy the cost benefits of being a direct supplier, since it no longer has to work indirectly through dealers like Compaq.

Indeed, Kocher predicted that Micron would become more aggressive on its prices in the near future.

"If you just execute on this direct model correctly, you have the ability to succeed in a big way," Kocher told analysts on Micron's conference call today. "The direct model will consolidate the indirect model, and we should be a beneficiary of that trend."

Still, it's not all sunshine for Micron. Revenues and earnings may have been up over the previous quarter, but they were down from the same figures a year ago. Roger Kay, an analyst at International Data Corporation, said the company wasn't at its nadir, but rather was just past it.

The company said its fourth-quarter results were favorably affected to the tune of $15 million or 9 cents a share because of "decreases in contingency accruals, which positively affected the company's PC gross margins."

Excluding that income, Micron would have earned 8 cents a share. Financial analysts predicted that Micron would earn 2 cents a share, according to First Call.

Micron's quarterly revenue fell to $339 million from $513.1 million a year ago.

The company said that its desktop unit sales were up 14 percent sequentially over the third quarter and that its server sales increased by 28 percent.

"We experienced an increase in demand across our product lines in the latter part of the quarter that points to a positive reception to our more competitive product pricing and aggressive sales and marketing," newly installed Micron chief executive Joel Kocher said in a statement.

But those gains largely were offset by slumping notebook sales, which were off by 20 percent. Micron blamed the slump on delays in adopting Pentium II-based models.

Micron Electronics has implemented a new marketing plan and has been cutting prices in an effort to compete with the top PC makers. The company's direct sales model is aimed at the market currently dominated by Gateway and Dell Computer.

The company reported fiscal 1998 net income of $48 million or 50 cents per share, compared with net income of $87.2 million or 92 cents a share reported for fiscal 1997. Fiscal 1998 income included an after-tax gain of $94.5 million or 98 cents a share, from the sale of 90 percent of Micron's contract manufacturing services business during the second quarter.

Annual revenue fell to $1.7 billion from $2 billion in fiscal 1997.

Micron Electronics stock closed more than 1 percent higher today at 16.9375 ahead of the news. The stock has traded as high as 18.75 and as low as 8.4375 during the past 52 weeks.