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THE DAY AHEAD: Dell cornered by growth expectations

Has Dell Computer (Nasdaq: DELL) painted itself into a corner with its insistence on being judged by its growth rate relative to the PC industry?

That's becoming a key question as Dell continues to lower analysts' revenue expectations.

The point was brought up after Dell said Wednesday that its sales for the third quarter would come up about 3 percent short of expectations at about $8.2 billion. "You seem to be setting a trap for yourself," said one analyst.

He has a point. Dell has made its name by being able to boast that it can grow well above PC growth rates, but the problem is the company hasn't been able to compete with its past success.

Wall Street got accustomed to 40 percent revenue growth from Dell, which was more than twice as fast as industry growth rates. Then Dell talked Wall Street down to revenue growth of 30 percent. And now Dell is still talking Wall Street down again. Dell has issued a revenue warning three times this year.

The direct PC vendor also missed sales estimates in the second quarter, bringing out a host of doubters.

If softness persists into the fourth quarter, Dell said its full-year 2001 revenue could be $32 billion, an increase of about $7 billion, or 27 percent, from sales for fiscal 2000. Revenue growth of 30 percent was Dell's line in the sand.

For context, Dell grew sales 38 percent in fiscal 2000 and 48 percent in fiscal 1999. Using Dell's PC growth estimate of about 15 percent to 17 percent for the year, the company isn't even doubling the industry growth rate anymore. If current trends continue, Dell may only be able to grow at the industry growth rate.

Chief Financial Officer James Schneider said the company's 2001 unit growth will be 1.5 to 2.5 times the industry growth rate, which is in the mid-teens. He didn't give revenue specifics.

Analysts were wondering out loud why Dell doesn't just change its benchmark. The company could talk up its storage and server growth rates, and focus on services and bottom line growth.

Instead, Dell is still milking the PC cow and focusing on growth rates. It's understandable why Dell won't abandon PCs -- the company is still the most efficient in the business. Dell noted that profit margins are firm because of falling component costs and the company will meet third quarter estimates. Fourth quarter earnings, however, will miss projections by a few pennies a share.

Some analysts noted that Dell's competitors -- notably Compaq (NYSE: CPQ) -- are "less dumb" than they were in the ྖs. In the ྖs, Compaq couldn't compete with Dell's direct model. Now Compaq could be gaining at Dell's expense. Compaq's earnings later this month will tell the tale.

Dell's competitors also offer chips from Advanced Micro Devices (NYSE: AMD), which is on a roll of late. Dell's revenue growth may be hampered by its loyalty to Intel (Nasdaq: INTC), which has problems of its own.

Dell officials didn't seem to buy the suggestion that the company should reinvent itself and the yardstick it is measured by. Chairman Michael Dell noted that the company has lowered its dependence on desktop sales to about half of revenue. The company also has product mix issues.

Dell also said he wasn't about to abandon desktop sales, since PCs are still three to four times more profitable for the direct PC vendor than its peers.

The consensus view is that the PC business is nice, but tech giants better diversify if they want their market caps to keep growing. That's why you see Hewlett-Packard (NYSE: HWP) talking services, IBM (NYSE: IBM) talking e-business and Gateway (NYSE: GTW) talking about "beyond the box."

The box just isn't the story anymore.

Dell is talking a good game about servers and storage, but the quarters are still dominated by PC sales. Dell faces tough competition from IBM, HP and Sun Microsystems (Nasdaq: SUNW) in the high-end server and strorage markets.

Until the company stops measuring itself by PC growth rates, Dell shares are going to see a lot of down days.

Micron Technology's PC outlook

Life must be grand in the memory market these days. Micron Technology (NYSE: MU) crushed Wall Street estimates in its fourth quarter and was optimistic about its upcoming fiscal year.

For starters, demand looks strong and the company continues to benefit from stable memory prices.

What may have been most notable, however, was Micron's outlook for the holiday PC selling season. Micron's customers are telling the company to expect a surge in PC demand for Christmas, and things could pick up as early as mid-October.

If Micron is right, a lot of PC-related companies that have issued profit warnings may be able to smile again. The catch? Micron's customers were expecting a big back-to-school season that never really materialized.TDAIN


• Dell 3Q sales dinged, sees lower 4Q earnings
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