Dell rebounds quickly after attacks

Although four weeks remain in its third quarter, the company's sales are on track following a quick rebound after the Sept. 11 terrorist attacks.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
3 min read
Dell Computer delivered a pleasant surprise Thursday, reaffirming its outlook for the third quarter and saying that its strategic, operating and financial position "is better than it's ever been."

Although there's still a third of Dell's quarter to go, analysts had expected the PC maker to cut its outlook. In early trading, Dell shares gained $1.62, or 8 percent, to $22.26.

"We were actually a little surprised by how fast things rebounded," said Dell CEO Michael Dell.

He added that part of the rebound was the result of orders from companies affected by the Sept. 11 events. "By the weekend (of the attacks) into the next week, we saw the fundamental demand come back pretty nicely," Dell said. "We still are very hopeful for the quarter."

Dell is the second major tech bellwether in as many days to indicate that its quarter is on target. Cisco Systems CEO John Chambers said on Wednesday that he was comfortable with earnings estimates for the networking giant's quarter.

Although many technology companies have recently issued profit warnings and cited the Sept. 11 terrorist attacks, Cisco and Dell gave some investors hope that not all companies have been hurt by the strikes.

In August, Dell said it expected to post third-quarter revenue of between $7.2 billion and $7.6 billion and record a profit of 15 cents to 16 cents per share.

Rebounding after attacks
Jim Schneider, Dell's chief financial officer, said on a conference call with analysts that the company's quarter was hitting the high end of expectations ahead of the Sept. 11 attacks, so it had a little buffer to a demand slowdown.

Dell Computer
Stock price from October 2000 to present.  

Source: Prophet Finance
In addition to a demand slowdown, Schneider said Dell also faced some component issues. The company, which prides itself on keeping inventory low, had trouble getting supplies when air travel stopped after the World Trade Center and the Pentagon were attacked.

"The events of Sept 11 caused temporary demand and supply constraints, but we quickly rebounded," said Schneider.

To compensate for supply hang-ups, Dell rejiggered its manufacturing. For example, Dell used its Malaysian factory to supply notebooks to the U.S. It also began filling parts backorders immediately on Sept. 17, when planes were allowed back in the air.

Dell also expedited orders to give victimized companies and relief agencies priority. "Since the tragedy, we have shipped more than 35,000 systems to affected companies," said Kevin Rollins, Dell president.

Gaining at rivals' expense?
Analysts said Dell might be faring better at the expense of rivals. Indeed, Compaq Computer, Dell's primary rival, said Monday that it would report a loss because of a "perfect storm" that hurt sales at the end of September. Compaq cited a slowdown related to the company's merger with Hewlett-Packard, troubles abroad and the terrorist attacks for its problems.

The global economic slowdown and the recession and Sept. 11 terrorist attacks have hurt many PC companies. Merrill Lynch recently trimmed its predictions for PC sales, saying it now expects U.S. sales to shrink by 6 percent and worldwide sales to fall 17 percent this year.

"We believe Dell's market-share gains have actually accelerated during the past month due to customer confusion over the Compaq-HP merger, and the focus on more cost efficient PCs by IT managers," said Lehman Brothers Dan Niles in a research note.

Indeed, Dell executives said the company expects to gain market share in all product categories, customer segments and regional markets during the current quarter. The company also said it was doing particularly well in the government and education markets.

The Compaq-HP merger coupled with the troubles at Gateway give Dell and "ice cream Sunday of opportunity," said Dell.

Rollins said Dell is in "full account acquisition mode" and will continue to cut prices.

"Acquired accounts stay with us. They are sticky," Rollins said. "Overall we believe that each acquisition account is a seed for (future) stable growth."

Rollins said Dell is expecting "a strengthening in demand as we move into next year," adding that Microsoft's Windows 2000 and XP operating systems and Intel's Pentium 4 should boost sales next year.

The company also plans to grow internationally. Dell could stand to benefit worldwide by posting gains in countries such as China and Germany, where it believes it can take market share.

To that end, Dell recently launched Smart PC--the first product it has developed for the price-sensitive Chinese market.

"There is still tremendous opportunity for us to grow," said Rollins.