THE DAY AHEAD: Dell hustling to prove critics wrong

4 min read

COMMENTARY: Analysts weren't impressed with Dell's second-quarter sales last month and questioned how the PC maker was going to keep its promise of 30 percent revenue growth this year. But Dell's doing everything it can to make things interesting in the next couple quarters.

At this point, it's only fair to point out that analysts couldn't use enough superlatives to describe its fantastic sales and earnings growth throughout 1997, 1998 and most of 1999.

In fact, Dell (Nasdaq: DELL) often found itself trying to water down expectations, realizing that 40 percent sales growth wasn't going to be sustainable indefinitely.

Last quarter, Dell beat the Street's consensus earnings estimate, raking in $603 million, or 22 cents a share, on sales of $7.7 billion.

The $7.7 billion in sales represented only a 25 percent improvement from the year-ago quarter, a fact that led several analysts to lower their sales and earnings estimates for the rest of the year.

At the time, Dell officials blamed sluggish sales into Europe for the slowdown.

However, it still held firm to its 30 percent growth target.

Analysts such US Bancorp Piper Jaffray's Ashok Kumar downgraded the stock following the results.

Kumar also cut his second-half sales estimate from $18.5 billion to $17.5 billion and earnings estimate from 53 cents a share to 51 cents a share.

"Without an enterprise strategy, the company is fast approaching a brick wall," he wrote at the time.

Keep in mind that Donaldson Lufkin & Jenrette and Chase H&Q both raised their fiscal 2001 earnings estimates following this "disappointing" earnings report.

All this brings us to Wednesday's announcement that Dell will enter the business-to-business marketplace arena by linking its online customers to Ariba's (Nasdaq: ARBA) online B2B exchange for buying and selling general business products.

Dell said the marketplace will be operational by the end of October and will result in bonus revenue that it and Wall Street analysts couldn't possibly have expected when they charted their sales estimates for the second half of the year.

Dell's going to charge sellers a fee for the bundled package of its hardware and software, as well as any additional services needed to link customers to the marketplace.

No one is saying how much they will charge at this point. And there's no telling how long they'll be able to cash in on this middleman role.

"Customers and suppliers, they don't want to pay tolls forever," said John Hampton, Dell director of new ventures, in a prepared release. "We can say investment has been significant enough to bring a very strong and viable solution to the market."

I'm not suggesting that this new marketplace deal is going to make up the 5 percent in sales they need to reach their 30 percent goal.

But it couldn't hurt.

More important, Dell also said that prices for key computer components are "softening," meaning it can bolster its bottom line and gross margins.

Just another bit of good news that could tack on a few basis points here and there.

Dell Vice Chairman Kevin Rollins said fears the company had in the second quarter about unfavorable PC component prices and availability have eased.

"I think we're starting to see now those fears have not been realized," Rollins said at a Boston technology conference hosted by SG Cowen Securities Inc. "We're seeing component prices soften. As we look forward in the next quarter or two, we see this as a trend. I think it's healthy for the industry. I think it's very healthy for Dell."

Throw in some new high-performance notebook PCs and maybe a slight improvement in sales to corporate clients in the third and fourth quarters and you have the makings for an upset.

Most analysts are convinced Dell doesn't have much of chance to meet the 30 percent target.

And it may not.

But Dell investors have to like the hustle Dell's showing to make it interesting. With bailing wire and chewing gum, Dell's on a mission to prove Kumar and the rest of its doubters wrong.

If Dell ends the year with 28 percent or 29 percent revenue growth, that would still mean sales improved more than 30 percent in the second half.

But Dell knows that moral victories don't count for much on Wall Street.

If it does meet or exceed that target, you can bet these analysts will be singing a much different tune in January.