THE DAY AHEAD: Dell's doubters emerge after weak sales

The days where Dell Computer (Nasdaq: DELL) was cut a lot of slack are over. The company is reiterating that it can grow sales 30 percent year over year, but may find it has some doubters -- especially after sales grew a relatively slight 25 percent in the second quarter.

Dell topped estimates with earnings of 22 cents a share and sales of $7.67 billion. Although the company's earnings beat estimates by a penny, sales were on the low end of projections. For reference, Ashok Kumar, an analyst at USB Piper Jaffray, projected revenue of $7.85 billion. Mark Specker, an analyst at Wit SoundView, projected revenue of $7.79 billion.

On a conference call, Dell's financial chief, James Schneider, acknowledged sales fell short by about $200 million of the company's target. He cited softer demand in Europe and government customers for the shortfall. Europe represented 19 percent of sales, down from 22 percent last quarter and a year ago.

Dell, however, made progress on the bottom line because of better component pricing, a share buyback and continuing investment income. In Europe, Dell is focusing on profitable customers and prepping for a second half rebound.

Although profits are nice, analysts are more concerned with top-line growth. Last week, Kumar downgraded Dell and said the company's "current revenue growth guidance of 30 percent is unsustainable."

This morning, Kumar shaved $1 billion from his second half revenue estimate ($18.5 billion to $17.5 billion). Kumar also shaved two cents from his second half earnings estimates to 51 cents a share. For the full year, Kumar is predicting earnings of 92 cents a share on revenue of $32.5 billion.

With half of its fiscal year complete, Dell has sales growth of 28 percent. But there wasn't any worry on Dell's conference call. Officials said the company is poised for a stronger second half. Dell's supporters are citing a Windows 2000 bump and early reports of unit growth in August as reasons to be bullish.

Schneider said he was confident demand will remain strong, with new products and software such as Windows 2000 and Linux driving interest. He added that seasonal patterns showing 10 percent to 15 percent sequential growth remain on track.

Dell execs were optimistic, but hardly promotional -- with good reason. In recent quarters, Dell has had to talk analysts down from expecting revenue growth of 40 percent to the current 30 percent target. If Dell doesn't produce 30 percent sales growth, Wall Street won't be happy. Not that Wall Street is happy now -- Dell shares are stuck in a tight trading range.

Dell should trade in a tight range -- investors are trying to figure out what the company is worth with slower sales growth.

There was certainly nothing on the conference call to change Kumar's mind. "Dell does not have the adequate earnings power in notebooks, server and non-system revenue to offset secular weakness in consumer and commercial desktops," said Kumar.

Kumar's big beef is that Dell doesn't have a coherent enterprise plan and its storage strategy lacks traction. "The company is fast approaching a brick wall," he said in a note Friday morning. "Storage sales were a fraction of total enterprise sales."

Vice-Chairman Kevin Rollins played down any concerns. Rollins noted that Dell has momentum in high-end server and storage markets. Higher prices and frequent replacements will boost sales and diversify Dell away from its desktop business. Rollins also said services will play a large part. The company also plans to expand into Latin America, China and India, areas where Dell's market share is slight.

Although Dell can prove Kumar wrong about the second half sales, it still may have to readjust expectations going into its next fiscal year. Kumar may be early, but he also may be right -- Dell's revenue growth targets may be too high.

The real e-commerce

While folks may peg Amazon.com as an e-tailing leader, Dell really wrote the book.

Sales through Dell.com jumped to 50 percent of revenue. Dell's online sales averaged more than $50 million a day at the end of the quarter, compared to $30 million a year ago.

Dell is also saving a bundle on technical support through Dell.com. One-half of all technical support requests and 76 percent of order-status inquiries are now handled online.

TDAIN
• Dell tops estimates, but sales are light
• Subscribe to The Day Ahead>