Dell sees strong quarter, but rivals edge closer

Dell is expected to report another strong quarter later, but pricing pressure and other factors appear to be closing the gap between the company and the rest of the industry.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Dell Computer is expected to report another strong quarter later today, but pricing pressure and other factors appear to be closing the gap between the company and the rest of the industry.

Dell consistently has outpaced the rest of the industry in terms of revenue and earnings growth for a number of quarters. For its second fiscal quarter, the company is expected to report earnings per share of 17 cents, according to a consensus estimate on First Call, a 41.6 percent increase compared to earnings of 12 cents a share for the same quarter a year before.

"I'm feeling pretty good about the results. Things got better in Europe this quarter," said Kurt King, an analyst at BancAmerica Securities, adding that the company's future also looks bright. "They execute well and they pursue only profitable businesses...They have the most efficient business model in the industry. There is no reason Dell can't continue to grow through sucking up market share."

Overall, the PC industry is enjoying increased sales due to discount and "free" PC offers.

For the second quarter, revenue is expected to reach about $5.9 billion for the quarter, a 36 percent rise over sales of $4.33 billion for the second quarter the year before. While this represents a decline from the 50-plus percentage growth the company saw in 1998, it more than doubles the industry average. The Round Rock, Texas company is in a good position to surpass Compaq in unit shipments in the United States and become the No. 1 PC manufacturer for the domestic market within a year or less, according to various estimates.

"The outlook is incredibly strong," added Dan Niles, an analyst at BancBoston Robertson Stephens, who predicts revenue of $6.1 billion.

Nonetheless, Dell is feeling the pinch of competition. Consumers have flocked to low-cost PCs, a trend that has benefited companies with lower average selling prices (ASP) than Dell, which has historically had high ASPs. Hewlett-Packard, for instance, reported record shipments in consumer PCs yesterday. Competition has also heated up in the corporate PC market. IBM enjoyed a resurgence in this market earlier this year, according to reports, with some of the growth coming at the expense of Dell and Compaq.

The company has also suffered a slight setback in getting notebooks, which are in high demand, out the door because of the lingering, industry-wide LCD shortage. Customers are being told not to expect certain notebooks for 25 days after ordering.

"Despite Dell's rich opportunity set and superior positioning, we believe the stock's valuation could fall victim to the difficult times that lay ahead for the industry," Steve Fortuna, an analyst with Merrill Lynch, wrote in a report yesterday.

The gap between Dell and the rest of the industry is shrinking. According to First Call estimates, Dell's earnings will grow 35.9 percent in calendar 1999, compared to 22.5 percent for the rest of the industry. In 2000, Dell will enjoy 36.1 percent growth, but the rest of the industry will rise to 30.6 percent.

Like other PC companies, declining PC prices have meant that the company has been forced to diversify into other ventures, such as increasing an emphasis on selling products from third parties, to maintain historical growth rates.

Bloomberg contributed to this report.