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Dell drops on downgrades, growth worries

The PC maker meets lowered expectations for its most recent quarter, but concerns over future growth and analyst downgrades send shares down nearly 20 percent in early trading.

Dell Computer met lowered expectations for its most recent quarter, but concerns over future growth and several analyst downgrades sent shares lower in early trading Friday.

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Dell: struggling to grow beyond the box
Brooks Gray, Technology Business Research
Dell shares dropped $5.38, or 19 percent, to close regular trading Friday at $23. They had sunk as low as $22.88 earlier in the day, approaching the 52-week low of $22.06. The company's shares have traded as high as $59.68 in the past year. Shares in other PC makers, including IBM, Hewlett-Packard and Gateway, and in chipmaker Intel also moved lower.

For its third fiscal quarter, Round Rock, Texas-based Dell earned $674 million, or 25 cents per share--an increase of 39 percent over 18 cents earned a year ago, excluding all one-time charges.

Revenue rose 22 percent to $8.3 billion from $6.78 billion a year ago, and 8 percent from the previous quarter's $7.67 billion.

While revenue came in slightly higher than expected, it is lower than Dell's historical growth percentage for the fall quarter. Historically, revenue for the PC maker has increased 10 percent to 13 percent from the second to the third quarter.

Concerns over future growth led to several analyst downgrades Friday morning. Banc of America Securities cut its rating to "buy" from "strong buy". Morgan Stanley Dean Witter also cut Dell's outlook to "neutral" from "outperform." The company's target price was cut to $35 from $37 per share. Dell was also downgraded to "buy" from "strong buy" at C.E. Unterberg Towbin.

Analysts polled by First Call/Thomson Financial expected the company to report earnings of 25 cents a share on revenue of $8.2 billion. While Dell edged out revenue expectations, the results followed a warning from Dell in September that European sales had weakened.

Before the warning, analysts expected Dell to pull in $8.5 billion in revenue.

Although Dell hit its current earnings and revenue targets for the current fiscal year, the future will become increasingly difficult.

Dell CFO James Schneider, for instance, said in a conference call with analysts that Dell's revenue will likely grow around 20 percent off a larger base in fiscal 2002, which begins in February. While higher than many PCs, the growth rate is well off Dell's historical trend. For a number of years, Dell saw revenue grow 50 percent annually. Earlier this year, the company startled Wall Street when it said revenue would only grow by 30 percent in the current fiscal 2001.

The slower rate of growth is partly due to declining PC and component costs, as well as a shift inside Dell away from desktops, its bread-and-butter product.

"We are focusing on enterprise products (services, servers, and storage) and see the desktops growing at a slower rate," said Schneider.

Earnings per share, however, will grow at a faster rate, Schneider added.

The outlook for the remainder of the year could also be affected by the European currency conditions, declining PC prices, and competition.

"Some of our competitors became incrementally more competitive," CEO Michael Dell said in the conference call. In the future, the company will concentrate on notebooks, servers, storage systems and services. Although a relative newcomer to the services market, Dell saw service revenue came to $665 million in the quarter, or 17 percent of Dell's total revenue.

"Our worldwide shipments of servers and notebooks grew significantly faster than the overall industry rate," Dell added in a statement. "We added more than a point of market share and moved closer to the No. 1 ranking in both product categories.

"In servers, Dell's unit growth was twice that of our largest competitor. Our notebook business alone recorded more than $8 billion in sales over the past four quarters and expanded 57 percent during that period," he said.

Dell saw revenue from Chinese operations grow 70 percent, while revenue from the Asia Pacific region grew 39 percent. Revenue from the Americas grew 24 percent. European growth, however, was only 7 percent.