WSJ on DELL - read down to the section on "COMPAQ'S REACTION" Also note MD admitting, without explanation, that DELL did not do so well in Germany.
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Dell Earnings Meet Estimates
But Revenue Growth Is Slowing
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
February 17, 1999
Dell Computer Corp. said its fiscal fourth-quarter profit soared to meet analysts' expectations but sales rose less than anticipated, sending its stock plummeting in after-market trading as investors feared its days of easy market-share gains are ending.
The direct seller of personal computers said revenue climbed 38% to $5.17 billion from $3.74 billion a year earlier, but far below the 56% average growth rate it has tallied in the prior eight quarters. Chief Executive Michael S. Dell said the most-recent period "was a great quarter certainly by any reasonable measure."
Dell shares, which tumbled nearly 12% Friday after two brokerage houses issued warnings about slowing growth, fell $1.125 more to $88.75 Tuesday in Nasdaq Stock Market trading. The company released its results after the market closed, sending its shares to about $77 in after-hours trading, according to Instinet.
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Dell Computer Executives in January Sold $116 Million of Company's Shares
Company Profile: Dell Computer
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Dell had hit a high of $108.625 on Feb. 2. The slide appeared to spread somewhat to several other technology stocks in after-market trading as well.
The decline came even as Dell said its board approved a 2-for-1 stock split, its seventh in seven years, to be paid March 5 to holders of record as of Feb. 26.
Not 'A Good Thing'
Until recently, Dell for many quarters had regularly beaten Wall Street's revenue and profit expectations. Results in the latest period raised fears that rivals that have embraced Dell's lean-inventory and direct sales approach are now chewing into its gains. "There's a zero-sum game in the business these days," said James D. Poyner, analyst at CIBC Oppenheimer. He said with Dell's huge stock-market valuation and high investor expectations, slowing revenue growth "is not perceived as a good thing."
Earnings in the quarter ended Jan. 29 rose 49% to $425 million, or 31 cents a diluted share, from $285 million, or 20 cents a share, in the year-earlier period. The profit was in line with the First Call consensus of analysts.
The Round Rock, Texas, company's regional sales results showed the broad slowdown. In Europe, its revenue climbed 40% in the fourth quarter from year-earlier results, compared with 68% growth in the third period. In its U.S., Canada and Latin American units, revenue rose 39% from year-earlier levels, compared with 46% in the third period. Mr. Dell said the company's German operations "didn't achieve the company's full expectation," but declined to elaborate.
Mr. Dell wouldn't say whether the results signaled a permanent deceleration of revenue gains from the better than 50% year-over-year track record. "We never predicted revenue growth before, and we're not going to start now," he said. Mr. Dell said the company's "flow of business looks quite strong; it's the strongest pipeline of business we've seen in several quarters."
Don Young, analyst at PaineWebber Inc., said work by International Business Machines Corp., Compaq Computer Corp. and their dealers on reducing inventories is removing some of Dell's traditional sales advantage. "The ability of Dell to prey on the indirects has been limited by these efficiency improvements," Mr. Young said. While he hasn't lowered his projection for Dell's revenue, Mr. Young said the company now will have to price more aggressively or sacrifice margins to meet its growth objectives.
With an average sales price in the fourth quarter of $2,350, Mr. Young said Dell will likely enter the fast-growing market for machines priced at under $1,000, a market segment it previously shunned.
Compaq's Reaction
Compaq was quick to pounce on the slowing as a sign its entry into direct sales was having an impact. "We're getting a very good result" from its launch of a new line of business personal computers, said Enrico Pesatori, Compaq senior vice president of corporate marketing.
Compaq recently said its telephone and Internet sales of a new line of PCs had reached $1 million a day, attributing much of the gain to sales that would have gone to Dell and other direct sellers. Mr. Dell said his company's Internet sales had reached $14 million a day, and topped $1 billion in the fourth quarter. In part, the growing Internet business has enabled the company to slow its hiring. In the fourth quarter, it added just 1,100 new employees, down from an average of nearly 2,400 new employees a quarter during the first three quarters.
For the full fiscal year, net income rose 55% to $1.46 billion, or $1.05 a diluted share, compared with $944 million, or 64 cents a share. Revenue rose 48% to $18.24 billion from $12.33 billion in the year-earlier period.
Dell said that in its fourth quarter operating expenses declined to 11.0% of revenue from 11.4% a year ago, helping to boost its cash position to $3.2 billion at the end of the quarter.
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