Dell the latest to issue earnings warning

The computer maker warns that fourth-quarter earnings will fall below analysts? expectations, due to lower-than-anticipated revenue.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
3 min read
Echoing a familiar refrain from computer makers, Dell Computer today warned that its fourth-quarter earnings will fall short of analysts? expectations.

Round Rock, Texas-based Dell said two events conspired against the company in the latest quarter, costing it $800 million in lost sales. The company could not deliver on consumer demand during the peak holiday season because of component shortages, and corporate customers unexpectedly continued to delay purchases because of Y2K concerns.

As a result, Dell now expects fourth-quarter profits of $430 million, or 15 cents per share, excluding any investment gains. Analysts expected Dell to earn 21 cents per share. Revenue is expected to reach $6.7 billion in the fourth quarter, while unit volumes will increase 30 percent, the company said.

Dell's stock closed today at $40.38. The warning came after the 1 p.m. PST close of regular trading. In after-hours trading the shares sank to about $36.38. Dell executives said today that a sporadic supply of chips during the quarter cost it $300 million in lost sales--primarily in its new consumer product line.

In addition, Year 2000 concerns reduced corporate sales by $500 million, Dell said.

"We're clearly not happy about this," Dell chief financial officer Tom Meredith said in a conference call with analysts today. "We're as competitive as anyone, and we'll have to sort through this."

During the call, Dell said its bottom line was essentially decimated by shortages of Intel's high-end "Coppermine" processors for desktop machines. Running at speeds of up to 800 MHz, the chip shortages hit Dell squarely in some of its newer, and more profitable, products.

Due to the shortage, the company was unable to deliver on products it had featured in marketing and promotional spots, preventing it from sustaining volume sales on high-profit products during the peak holiday season. As a result, the company's operating expenses were a much higher ratio to profits than usual, according to Meredith. The chip shortages, Meredith said, would cost the company 3 cents per share in bottom-line earnings.

"On the processor side, we are completely Intel at this point," chief executive Michael Dell said during the call, squashing any possible speculation the company would immediately switch to AMD because of the shortage. "The transitions we've just gone through are quite challenging for our company and our partners. But I don't think we should take a rash action based on a difficult transition."

The other major issue during the quarter was the company's inability to accurately forecast the sluggish spending of corporate customers, who devoted time and money to Year 2000 concerns. To Dell's dismay, the start of the new year failed to boost sales.

"We expected a strong rebound in January," Meredith said. "The rebound in January simply did not happen."

Today's announcement marks the second consecutive quarter Dell has had to warn Wall Street that it won't meet expectations.

The company announced last fall that its third quarter would be hurt by unexpectedly high memory prices following a major earthquake in Taiwan that curtailed production.

At the time Dell said its operating margins would be squeezed after learning that prices would be as much as 25 percent higher than expected.

Dell's troubles are not unique: Other computer makers have also been hit by chip shortages and Y2K worries. Last week, Gateway reported that fourth-quarter earnings were down 2.4 percent on a yearly basis, meeting lowered analyst expectations.

Gateway had previously warned that earnings would not meet expectations because of a shortage of Intel chips and some pullback in corporate and government sales due to Y2K concerns. To alleviate the chip shortfall, Gateway recently said it will use AMD products in some systems.

Compaq yesterday reported first-quarter results that were in line with expectations, although the results were substantially below its performance of a year ago.

Compaq's troubles stem from issues beyond Y2K and chip shortages. The company is struggling to regain its lead in the consumer PC market and has yet to get its direct model up to par with competitors such as Dell.

Meanwhile, IBM late last year warned that it expected to miss earnings estimates because large corporate customers were delaying purchases due to the Y2K bug.

When Big Blue reported its quarterly results this month, it beat Wall Street's reduced expectations.