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Chip shortfall, Y2K expected to hurt Dell earnings

As with Compaq Computer, IBM and Gateway before it, Dell will be glad to turn out the lights on the fourth quarter of 1999 when it reports earnings later today.

As with Compaq Computer, IBM and Gateway before it, Dell will be glad to turn out the lights on the fourth quarter of 1999 when it reports earnings later today.

When Dell warned the investment community in late January that it wouldn't meet earnings expectations, the immediate reaction was another sell off in the stock. It was a familiar move by Dell investors in 1999.

Shares in the Round Rock, Texas-based PC maker have fallen about 32 percent from its 52-week high, making it one of the lower-performing issues in the Standard & Poor's 500 Index of late. Dell had been the highest-performing member of that index from 1996 through 1998, during which time the stock split four times.

In midday trading today, Dell was up about 7 percent to $37.84.

To be sure, Dell isn't in dire straits--it's still earning money, and sales are growing much faster than the industry as a whole. Dell said last month it expects fourth-quarter profits of $430 million, or 15 cents per share, excluding any investment gains. However, its fourth-quarter results aren't expected to compare well with year-ago results, when Dell posted net income of $425 million, or a split-adjusted 15 cents per share.

Analysts had originally expected Dell to earn 21 cents per share but lowered their estimates to an average of 15 cents per share after January's warning, according to surveys by First Call/Thomson Financial.

Revenue is expected to reach $6.7 billion for the quarter, while unit volumes will increase 30 percent, the company said.

Dell executives blamed an $800 million shortfall in sales on a sporadic supply of chips during the quarter and a sales slowdown in corporate accounts due to Y2K concerns. The chip shortfall cost it $300 million in lost sales--primarily in its new consumer product line, while the Y2K concerns reduced corporate sales by $500 million, Dell said.

Dell is closing out fiscal 1999 on a low note. The results mark the second consecutive quarter Dell has warned Wall Street that it won't meet expectations.

Dell isn't the only PC maker sounding a sour note about 1999. Gateway had lower-than-expected earnings for the same reasons as Dell. To alleviate the chips shortfall, Gateway recently said it will use AMD products in some systems.

Compaq's most recent quarterly results were in line with expectations, but the results were substantially below its performance of a year ago, as the company struggled to tune its production and business model to regain traction against direct vendors like Dell.

"The (earnings) numbers are going to be anticlimactic," Lou Mazzucchelli, an analyst with Gerard Klauer Mattison, told Bloomberg. "We're going to be looking for signs of increased sales momentum, signs that the Y2K funk is behind us."