Dell's loss meets range
Chairman optimistic about a turnaround in spring 2002
08/17/2001
By LEAH BETH WARD / The Dallas Morning News
In what's become a precarious dance of making bad news look not-so-bad, No. 1 computer maker Dell Computer Corp. met forecasts Thursday for a second-quarter loss. But company executives said they don't see much relief ahead.
Austin-based Dell posted a loss of $101 million, or 4 cents a share, its first loss since 1993.
Last year, Dell earned $603 million, or 22 cents a share, in the same quarter. Revenue was flat at about $7.7 billion.
Chairman Michael Dell said in a conference call with reporters that it could be the spring of 2002 before the industry turns around.
"We're very well positioned for a bounce back in demand that we think is likely to occur sometime in the spring of next year, but we can't be completely precise about it," Mr. Dell said.
Dell Computer has been juggling its own fierce price-cutting against the need to stay profitable on an operating basis. Net income from operations, excluding charges, was $433 million, or 16 cents a share, matching the consensus expectation of analysts surveyed by Thomson Financial/First Call.
"When we sell desktop computers, we make a profit," Mr. Dell said. "When our competitors do, they lose money."
That said, Dell's gross margins declined to 17.5 percent from 21.3 percent.
Analysts said the drop-off means Dell is hurting from the price war largely of its making.
Jim Schneider, chief financial officer, said that net operating margins are a better indicator of financial fitness and that they "remain stable."
Eric Lundquist, editor-in-chief of eWeek, said he remains a believer in Dell's direct-sell model, which lets buyers purchase their hardware over the Internet or telephone. The direct transaction translates into a faster turnover in Dell's inventory and a lower price for the buyer.
"Dell has all the pieces. The only question is whether investors are willing to wait out this tough market," Mr. Lundquist said.
Mr. Schneider said that Dell's revenue in the next quarter would be flat or down 5 percent compared with an industry forecast of a decline up to 10 percent.
He said the company does not foresee further job cuts since about 4,000 employees were dismissed in recent months, and he called the company "properly sized at the moment." The company took a $742 million pretax charge, which includes job cuts and losses on venture investments.
Price-cutting in PCs and hardware such as servers has been a slippery slope. Dell's average price per product was $1,850, down 17 percent from the year-earlier period. Yet the company still managed to grab market share and now has about 40 percent of the U.S. corporate market.
Demand could get a boost from two external developments, according to Mr. Dell: Microsoft Corp.'s new XP operating system and Intel Corp.'s aggressive pricing on Pentium 4 chips.
"But as for a strong macro pickup, it's very much tied to the economy," he said.
Investors haven't been very patient with Dell despite its lead in a down market.
Shares have lost about 10 percent of their value in the last week, closing Thursday at $25.38, down 12 cents or 0.5 percent.
Thursday morning, Credit Suisse First Boston cut its 2002 earnings estimate for the No. 1 PC maker to 68 cents per share from 70 cents and reduced its 2003 forecast to 90 cents from $1.
The brokerage said in a research note that Dell is not indefinitely protected against turmoil in the industry despite its ability to grab market share by cutting prices.
Dell said it projects third-quarter earnings per share of 15 to 16 cents.
Also on Thursday, Dell said it has created a new executive position – chief marketing officer – naming a former McKinsey & Co. consultant to the post.
Michael George most recently had been an executive assistant to Mr. Dell.
In his new job, he will be responsible for marketing and advertising and will report to Mr. Dell and co-presidents Kevin Rollins and Jim Vanderslice.
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