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Dell earnings under the microscope

Although it continues to grab market share, the computer company will find its earnings scrutinized by investors and analysts for clues to the health of the PC market.

Although it continues to grab market share, Dell Computer will find itself under the microscope today as investors and analysts scrutinize its earnings announcement for clues to the health of the PC market.

After market close today, the Round Rock, Texas-based computer company is expected to report earnings of 21 cents a share for its fiscal second quarter, an increase of approximately 11 percent over earnings per share of 19 cents. Revenues are expected to come in at around $7.9 billion, a 30 percent rise from last year.

Gartner analyst Martin Reynolds says the research firm's data shows that the U.S. commercial PC market is saturated, with about 71 million potential users and expected shipments of 33 million units in 2000.

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While annual comparisons like that might be impressive for some companies, the numbers pale in comparison with Dell's previous results. A year ago, net earnings for the fiscal second quarter totaled $507 million, an increase of 46 percent over the same period the year before, while revenue came to $6.1 billion, 42 percent over the previous year.

Growth in the PC market also appears to be off the pace set in 1999, according to some analysts. The U.S. corporate market--Dell's traditional bread and butter--grew by only 11.5 percent, according to Dataquest. Meanwhile, consumers seem more entranced with non-PC devices such as handhelds.

"We continue to believe that Dell does not have adequate earnings power in notebooks, server and non-system revenue to offset the secular weakness in consumer and commercial desktops," Ashok Kumar, an analyst at US Bancorp Piper Jaffray, wrote earlier this week. "While we expect Dell to continue to deliver on the bottom line, we are skeptical that the company will be able to meet the 30 percent revenue growth expectations on a sustainable basis."

Opinions, however, are divided. The second quarter is typically the slowest time of the year. Dell also continues to grow faster than the market as a whole.

"Even though revenue is going to be a little light, I don't think it's going to be a disaster," countered Lehman Brothers analyst Dan Niles. "The PC business is going to be the exact opposite from last year. The back half of the year is going to be absolutely terrific."

Among the highlights for Dell, average selling prices for their PCs appear to be climbing, adding to gross margins, and the company likely will be able to reiterate its expectations for revenue growth of 30 percent for the near future. Niles, in contrast to Kumar, also said notebook and server sales are up for Dell.

Last August, the company reported better-than-expected earnings for its fiscal second quarter and previewed a new style of consumer PC at a convention in Austin. Reports from International Data Corp. (IDC) showed that in the calendar third quarter the company wrested the top spot in the United States from Compaq Computer.

Then the problems began to appear. Rising component costs prompted the company to lower earnings expectations for its fiscal third quarter, ended October 1999. Dell keeps less memory and other components on hand than other PC makers and was particularly stung by shortages caused by the Taiwanese earthquake.

Problems at Intel also rebounded on Dell. The chip giant delayed the release of its chipset for Rambus-based computers and found itself saddled with a shortage of Pentium IIIs.

Dell had to postpone releasing its Rambus-based systems and lowered expectations for the fiscal fourth quarter, ended in January. A slowdown in corporate purchasing inspired by the Y2K bug also put a damper on sales. Overall, the company said it missed out on $800 million in sales.

"We expected a strong rebound in January," Dell CFO Tom Meredith said in late January. "The rebound...simply did not happen." Dell executives began to tell analysts to expect annual growth to slow to 30 percent from 50 percent.

During its last quarter, Dell surprised Wall Street with earnings of $525 million, or 19 cents a share, 3 cents better than expected. Revenues came to $7.28 billion, a 31.5 percent annual increase.

Despite the rebound, queasiness re-emerged. Dell unceremoniously pulled its WebPC, the stylish computer it previewed last year in Austin, after six months on the market. PC growth became an issue in July.

Charles Smulders, an analyst at Dataquest, said last month that saturation, at least in the U.S. market, appears to have begun to set in. Foreign markets are growing faster, but U.S. manufacturers are losing ground regionally to local providers such as China's Great Wall.

One of the few bright spots was sales of inexpensive, almost disposable, corporate computers, such as Compaq's iPaq.

Dell currently does not market such a computer. However, expect one soon, said IDC analyst Roger Kay.

"You can be very sure in the deafening silence in Austin that something like this is coming," he said.