Strong Quarter by Dell Does Not Satisfy Wall Street
Dell Computer Corp. reported fourth-quarter earnings Tuesday that matched analysts' estimates and would have been stupendous for any other maker of personal computers. But it was not enough for Wall Street.
That was because a slowing of the growth rate of Dell's revenue touched off fears that the company's days of defying gravity were over.
Dell shares closed Tuesday at $88.75, down $1.125, in Nasdaq trading, and traded as low as $85 after hours. But the real action had already occurred, on Friday, when Dell shares tumbled $12, to $89.8750, dragging the market with them, after two analysts predicted that intensified competition would slow Dell's sales growth from an average of 56 percent in the last eight quarters, to something closer to 40 percent. In fact, on Tuesday Dell reported sales growth of just 38 percent.
"The real question is: Was the slowing down in growth rate a lasting change in the metric of the company, or is it a one-quarter phenomenon?" said Charles Wolf, an analyst with Warburg Dillon Read. "You can't expect a company of $18 billion in revenues to continue to grow at 50 percent, but the signals were out there to suggest that their growth rate would be much higher than it was."
Michael Dell, the company's founder, chairman and chief executive, said in a telephone interview that by any conventional measure, Dell's performance was strong.
"We don't forecast our growth rate in units or revenues, but we do believe we can outgrow the industry," he said. "When you look at our performance in the quarter, we set records for basically everything. On a broad scale, it was a great quarter."
For the quarter ended Jan. 29, Dell reported earnings of $425 million, or 31 cents a share, up 49 percent from $285 million, or 20 cents a share, in the comparable period a year ago. Revenues rose 38 percent, to $5.17 billion, from $3.74 billion in the fourth quarter of the 1998 fiscal year. Per-share figures reflect a reduction in the number of shares outstanding; Dell spent $390 million during the quarter repurchasing shares.
Dell noted that at 55 percent, Dell's growth rate, measured in units, was still three and a half times that of the personal computer industry as a whole and three times that of its nearest competitor. "Our win rate in corporate accounts continues to climb, and we have what we think is a very strong pipeline," he said.
Analysts said that for any other company, Dell's performance in the quarter would have been considered exemplary. But because the company has outperformed the industry and exceeded estimates so consistently for so long, any slowdown is cause for concern. Dell shares have commanded a huge premium relative to other computer manufacturers because the company's growth rate was so much higher. If that growth rate declines, the stock price could fall sharply, analysts said.
"The stock is really predicated on everything working, revenues and earnings, and the revenues were far below expectations, about $300 million low," said Daniel Kunstler, an analyst with J.P. Morgan.
"Were it any other company, then it would have been an outrageous quarter," said Wolf of Warburg Dillon Read. "But at Dell, with the stock trading at 75 times earnings, the betting has been that the growth will continue."
For the year, Dell reported earnings of $1.46 billion, or $1.05 a share, up 55 percent from $944 million, or 64 cents a share, in the 1998 fiscal year. Revenues rose 48 percent, to $18.24 billion, from $12.33 billion in the previous year.
Separately, Dell said Tuesday that its board had declared a 2-for-1 stock split, the company's seventh in the last seven years. All per-share data reflect the number of shares outstanding prior to this split.
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