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Dell latest PC maker hit by earnings slowdown

The PC maker says that fourth-quarter earnings will be as much as 8 cents a share lower than expected, on revenue of between $8.5 billion and $8.6 billion.

Dell Computer on Monday morning issued a warning that fourth-quarter earnings would be as much as 8 cents a share lower than expected.

The Round Rock, Texas-based computer maker said that fourth-quarter revenue would land in the range of $8.5 billion to $8.6 billion, an increase of 25 percent to 27 percent from a year earlier, but lower than previously thought. The company had expected sales for the quarter, which ends January 31, around $8.7 billion.

Dell now expects earnings per share to be between 18 cents and 19 cents, compared with earlier guidance of 26 cents a share. A consensus of analysts polled by First Call had anticipated earnings per share of 25 cents for the fourth quarter and 91 cents for the year.

Dell shares fell .25, or less than 1 percent, to $25.38 in morning trading.

Analysts had been expecting a profit warning for weeks, but Dell waited until market researchers Dataquest and IDC disclosed PC shipment estimates for the fourth quarter. Those estimates Friday put Dell and Hewlett-Packard PC shipments up substantially in the United States and worldwide. Dataquest reported that Dell's worldwide PC shipments rose more than 40 percent during the fourth quarter compared with the year-ago quarter.

Despite strong PC shipments, Dell cited a sluggish economy and slowing demand for computers and services as the reason for the profit warning.

During a Monday morning conference call, Chief Financial Officer James Schneider said that aggressive pricing during the soft sales period led to the lower earnings.

"The magnitude of the economic slowdown and the resulting slowdown in economic computing demand has been greater than anyone expected," Schneider said. "Driving growth in this environment required more aggressive pricing, which had a negative effect on (earnings per share)."

Schneider also said that Dell's operating expenses would "improve slightly this quarter from the last quarter as a percentage of revenue."

Schneider and Chief Executive Michael Dell also touted the company's market-share gains during the quarter, which Schneider characterized as four times market growth.

But Gartner analyst Kevin Knox downplayed the market share gains.

"If you ask anybody, they would certainly rather have profitability grow than unit volumes grow," he said. "It's great that they grew, but if they had good unit volumes, they wouldn't be issuing a profit warning."

Schneider and Dell emphasized that sales of high-margin enterprise products, such as servers, increased 50 percent during the fourth quarter. Dell also pointed to a sales rebound in Europe.

"In terms of geographic demand, we're seeing a nice momentum in Europe, which is certainly (what) all of you and we have been looking for," Dell told financial analysts. "The momentum in Europe is the best it's been in quite a long time."

Dell also expects strong sales growth in Asia, Canada and Latin and South America.

"I was impressed with their turnaround in Europe," Knox said. "They showed some good growth numbers there.

Dell joins a litany of companies battered by the near collapse of PC sales in the fourth quarter. The other two of the top three PC makers, Compaq and Hewlett-Packard, had already issued profit warnings. Apple Computer and Gateway earlier reported disastrous results. In the case of Apple, revenue fell 57 percent. Gateway announced it would cut 10 percent of its work force because of slow sales.

The fourth-quarter sales crisis took many PC manufacturers by surprise. Retail revenue, for example, plummeted 30 percent in December compared with a year earlier. IDC on Friday said PC shipments grew a scant 0.3 percent in the fourth quarter compared with previous double-digit growth.

Given the current state of the PC business, Dell's warning didn't surprise some financial analysts. In a research note released Monday, before Dell's warning, Merrill Lynch analyst Steven Fortuna said he expected a Dell warning within two weeks. Fortuna lowered his fourth-quarter estimates to 23 cents earnings per share from 26 cents. He lowered revenue estimates for the quarter to $8.3 billion from $8.79 billion.

Schneider expanded some of the economic and sales factors that affected Dell during the fourth quarter, including a decision to cut gross margins.

By pricing aggressively and, therefore, taking lower margins, Dell gained market share and sales at the expense of competitors, Schneider explained.

Dell emphasized that the company's low-inventory, direct business is an asset that proves doubly important, given the current PC sales crisis. "I believe the largely indirect competitors will be faced with quite a challenging environment going into the first half of the year, perhaps with an excess of inventory and perhaps the wrong kind of inventory. We believe this gives us a great landscape to continue (our) strategy."

Knox balked at Dell's inventory jockeying. "Direct vendors have inventory issues as well--they have component inventory," he said. The Gartner analysts noted that components must be shipped from overseas, so Dell must carry some in stock to build systems. "Michael Dell is going to put the best foot forward in terms of inventory, but even Dell is exposed in the PC sales slowdown."