Dell hits target amid profit slump

Dell reported a second-quarter profit of $433 million, or 16 cents per share, excluding a pretax charge of $742 million related to layoffs, facilities closures, and other cost-cutting measures. On the same basis, profits totaled $603 million, or 22 cents a share, in the same period a year ago.

Sales totaled $7.61 billion, roughly flat with last year's $7.67 billion.

Analysts polled by First Call predicted second-quarter profits of 16 cents a share on sales of $7.7 billion. Counting the $742 million charge, Dell reported a net loss of $101 million for the quarter.

The numbers were down somewhat from the previous quarter, when Dell reported a profit of $462 million, or 17 cents a share, and sales of $8 billion. At that time, company executives predicted second-quarter earnings of 15 cents to 17 cents a share, excluding charges.

Dell shares were down slightly to $24.94 in after-hours trading Thursday on the Island ECN, after closing regular trading down 12 cents, or 0.5 percent, to $25.38.

A significant pickup in the PC market probably won't happen until the spring of 2002, Dell executives said.

"We still see Windows XP and Intel Pentium 4 price cuts at being catalysts" for third- and fourth-quarter sales, CEO Dell said during a conference call following the earnings announcement.

However, "We generally are looking towards the spring of 2002 as a period when we would see a more robust demand cycle from corporations," Dell said.

At least one analyst believes that Dell doesn't have to trim its profit margin any further to maintain its lead in the PC market.

Because of its supply chain efficiency, "Dell doesn't have to cut prices any faster than components are coming down," said Brooks Gray, an analyst with Technology Business Research.

Dell's "core business should remain pretty steady," he said, adding that "things are looking up" for the company in relation to other PC makers.

Dell has pushed hard to drive up sales despite an overall gloomy PC market, launching an intense price-cutting campaign intended to steal sales from rivals. Dell overtook Compaq Computer as the worldwide PC sales leader in the first quarter of this year, according to statistics from Gartner's Dataquest, and held onto its lead in the second quarter.

Recently, during the company's annual shareholders' meeting, Michael Dell touted his company's success against competitors, thanks to its streamlined manufacturing process.

"We're winning the price war," Dell said, citing costs that are now 50 percent lower than competitors.

But the ultimate cost to Dell itself has not yet been measured.

Analysts have warned that it could be some time before the PC market returns to normal--as early as next year and as late as 2003. Analysts have also made it clear that a protracted price war will neither help Dell's profitability nor its standing on Wall Street.

Still, aggressive price cuts helped the PC maker post nearly double-digit annual growth for the second quarter in the United States and worldwide, while sales declined for the remaining top five PC makers, IDC and Dataquest reported last month.

Dell led global PC sales with 4 million units, followed by Compaq with 3.4 million, according to Dataquest. IBM claimed the third spot with 2.13 million, and Hewlett-Packard trailed with 2.07 million units. Dell also took the top spot in U.S. sales with 2.53 million units vs. Compaq's 1.38 million and HP's 990,600.

The PC price war sparked by Dell, compounded with a slowing economy, has put pressure on all of Dell's competitors, hitting Compaq and Gateway especially hard, according to analysts.

Gateway posted lower than expected second-quarter earnings and threatened additional layoffs in July. For its part, Compaq met lowered expectations for second-quarter earnings but announced plans to lay off 1,500 additional employees.

Dell has extended its PC price war to the server front, where it introduced a low-price PowerEdge 500SCserver, starting at $699 on August 2.

It's harder to win server customers on price alone, however. Though Dell increased the number of server units it sold in the second quarter, it lost ground in revenue, according to Dataquest analyst Jeff Hewitt.

Dell slipped from garnering 11.3 percent of the U.S. server revenue to 10.5 percent, according to a Dataquest report issued on Wednesday.

"We believe that the environment may be one where units could be flat to down for the entire industry," said Dell CFO James Schneider. "With drops in selling prices as components begin to decline, it's possible that the industry could be down 5 to 10 percent" sequentially.

As a result, Dell predicts that third-quarter sales could range from flat, at $7.6 billion, to down as much as 5 percent sequentially. However, "we believe we will have sequential growth in units," Schneider said.

"It's possible that EPS (earnings per share) could drop a cent, so we're talking in the 15 to 16 cent range for the coming quarter," he said.

While Dell said it would cut as many as 4000 employees in May, executives said the company had only reduced its staff by a net of 3,000 employees and hinted that cuts might stop there.

"We are now sized properly for what we see in our business going forward," said COO James Vanderslice.