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Dell shows slip in revenue

The computer maker reaffirms expectations for the first quarter of $8 billion in sales--down from $8.7 billion in the fourth quarter--and earnings of 17 cents a share.

    Dell Computer on Thursday delivered the news that Wall Street had been expecting: It will post its first quarter-to-quarter revenue decline in 17 years.

    Addressing financial and trade analysts during their annual meeting with the company, Dell Chief Financial Officer James Schneider reaffirmed expectations for the first quarter of $8 billion in sales and earnings of 17 cents a share. That is in line with a consensus of analysts polled by FirstCall.

    But that figure also is an 8 percent decrease from the fourth quarter's $8.7 billion in sales, when Dell missed earnings estimates by 2 cents a share.

    Because of global economic uncertainty, Schneider would not say more about expectations for 2001.

    "We're cautious, though, because we still have a full one-third of our quarter to go," Schneider said during the company?s first-quarter conference call. He acknowledged that "demand in the U.S. is soft," but noted two bright spots: "strength in consumer business and public segments."

    The news wasn't all bleak. Dell's sticking to its previous outlook could put the company among high-tech's elite: those passing through the first quarter without issuing a profit warning. Apple Computer and Microsoft are members of that group, but companies such as Compaq Computer, Gateway and Intel are among the larger group that have issued warnings.

    Technology Business Research analyst Brooks Gray blamed Dell's sequential shortfall on "market conditions. There is a certain saturation of the U.S. market, and they are heavily reliant on that market," he said.

    CEO Michael Dell blamed the brutal PC sales slowdown for the company's woes, but played up the company's strong points such as its streamlined procurement and logistics, and other advantages inherent in the direct-sales model.

    Wall Street seemed content with the news. Dell's stock rose some 10 percent by midmorning, up $2.44 to $24.63 on volume of 20 million shares.

    In a research note, Merrill Lynch analyst Steven Fortuna on Thursday dismissed concerns about a sequential decline in sales.

    "We believe that Dell's internal plan was substantially higher than the plan they presented to the Street," he said. Fortuna said he's not surprised that Dell is being cautious, adding that "even if they fall short of their internal plan we believe they will come in at or above their forecast plan of 10 percent top-line growth."

    Fortuna emphasized that he does "not read anything negative" into Dell's holding back a forecast for the rest of the year.

    Positive spin
    Dell's CEO touted the company's impressive market-share gains as offsetting news of slower sales growth.

    The company's recent market-share grab follows "essentially the same strategy we've been deploying for the last 10 years," he said.

    Dell's first quarter doesn't close until May 4, and the company has made aggressive use of incentives to boost sales over those of rivals, many of which closed their quarters on March 31. The company has been offering, among other things, free MP3 players and CD-RW drives to encourage consumer PC sales.

    Both Dell executives noted the company's relative strength in the fourth quarter. "While many competitors experienced no growth or losses, Dell gained significant market share and maintained industry-leading profitability," Dell said.

    Early in the fourth quarter, the company responded faster to declining component costs and "passed cost declines on to our customers," Schneider said.

    But financial analysts questioned whether Dell's aggressive pricing to gain market share was running ahead of component cost declines, eroding gross margins. Dell's gross margins fell to 18 percent from 21.3 percent in the third quarter. Previously, the company warned that first-quarter gross margins would be flat with the fourth quarter.

    Dell said the fourth quarter's "relative comparison between Dell and competitors suggests that the operating margin performance is quite remarkable." But he added, "Certainly this is a period of slower industry demand, and we've taken it upon ourselves to accelerate the transition."

    The CEO made it clear that the company would continue to push into services, servers and storage, pricing fiercely as the products become commodities. "We believe we have the right business model, one that is focused to thrive on the commoditization process that is continuing in our industry," Dell said.

    Schneider defended the company's pricing push, even at the expense of higher margins. "Had we not been as aggressive on pricing, we would have a lot less volume and probably not made any more money during this period. Our larger share base puts us in a much better position."

    Revenue grew 28 percent in the fourth quarter, while unit shipments rose 43 percent and Dell gained 2 percent in worldwide market share, Schneider said. The company also shifted away from dependence on PCs, with 47 percent of fourth-quarter revenue coming from enterprise products and notebooks, he added.

    Dell exited the fourth quarter with just five days of inventory. Schneider used that measurement to take a dig at rival Hewlett-Packard, asserting that HP had "three months more inventory than we had."