Sales concerns slow Dell

Shares of Dell Computer tumble today despite matching profit estimates and announcing another stock split.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Shares of Dell Computer took a hit today despite matching profit estimates for its fourth quarter yesterday by posting earnings of 31 cents a share and announcing another stock split.

Yesterday, the computer maker reported that earnings grew roughly by 49 percent, going from 20 cents a share, or $285 million, for the fourth fiscal quarter in January to 31 cents a share, or $425 million, for the fourth quarter this year. Revenues meanwhile grew 38 percent, from $3.74 billion to $5.17 billion. Dell's fiscal year closed at the end of January.

For fiscal 1999, Dell reported revenues of $18.2 billion, up 48 percent over 1998, and earnings per share of $1.05, or $1.46 billion, up 64 percent over the fiscal 1998 total.

Although the company hit expectations for the quarter, analysts are concerned about the future. Sales growth appears to be slowing sequentially, which could signal a slowdown for Dell, or even the industry as a whole. Dell, however, is still growing much faster than others in the PC industry.

The company will also more aggressively market hardware and software from third parties on it Web site, which will diversify and expand profit opportunities. Dell will further outline its strategies in this regard at an analysts meeting in April.

Dell also announced a 2-for-1 stock spilt that will take effect on March 5.

CEO Michael Dell himself acknowledged that something of a sales slowdown occurred. Although Dell gained market share against nearly all of its competitors, and grew at more than three times the market, revenues were roughly $200 million or more short of internal expectations.

"We were not aggressive enough in our competitive pricing in the third quarter to see the level of growth in the fourth quarter," that the company anticipated, he said.

"We were a bit lighter in the top line than we expected," said Tom Meredith, Dell CFO. The company was also not as aggressive in cost cutting as it could have been.

To partially guard against future dips, the company will aggressively expand sales of third party products on its Web site, said Meredith.

Analysts called the slowdown inevitable, but did not view it with alarm. The recent surge in growth was simply too hard to sustain. And, even though a slowdown in PC sales may start to occur in the second half of the year as a result of the Y2K problem, Dell is in one of the better positions to weather any problems.

"The business model is still in tact. [But] for Dell to continue to grow at historic rates is untenable," said Ashok Kumar, computer analyst at Piper Jaffray, adding "Dell investors are like the modern day equivalent of flat-earthers."

Many metrics were up during the quarter. Gross margins rose to 22.4 percent for the fourth fiscal quarter, up from 22 percent for the same period the year before. Sales grew by 40 percent in Europe, 39 percent in the Americas and 30 percent in Asia.

Internet sales by the end of the year were averaging close to $14 million a day. More than $1 billion of sales occurred on the Web during the fourth quarter.

Dell fared well against its closest competitors as well. In the fourth quarter, Dell experienced a growth rate that was three times Compaq's growth rate, said Rollins. Dell also more than two points of market share in 1998, more than the other major vendors. In addition, the company landed 50 to 60 percent of the contracts with large customers sent out for bid in the fourth quarter.

"We were gaining share more rapidly than anyone else," he said.

"Our growth is going to continue to exceed the market," said Dell. "In the fourth quarter, our growth exceeded the market, but perhaps not the amount you might have expected."