Dell suffering consequences
of saying nothing
BY ADAM LASHINSKY
Mercury News Staff Writer
DELL Computer Corp. (Nasdaq, DELL) did the seemingly
impossible Tuesday: It disappointed Wall Street. But the formerly
untouchable company transgressed on a more serious count by
failing to warn investors sooner.
Technically, Dell didn't do anything wrong. Wall Street analysts
who follow public companies publish earnings estimates for the
quarter and year ahead that are reported as the ''consensus'' or
average forecast. When a company beats, meets or misses
expectations, its performance is being measured against Wall
Street's estimates of earnings per share. If management knows
results will differ significantly, it typically will ''pre-announce'' those
results.
But Dell didn't miss the consensus earnings estimate of 31 cents
per share. It hit the estimate on the nose. That's still a sin for fast-growth companies or a powerful
monolith (I didn't even think monopolist) like Microsoft Corp. (Nasdaq, MSFT), which
routinely beats the bottom-line estimates it skillfully has managed down.
Dell, however, let down investors regarding its top-line figure, otherwise known as revenues or
sales. Analysts had expected about $5.4 billion in fiscal fourth-quarter sales, and Dell delivered
almost $5.2 billion. Dell's fiscal year ended Jan. 29.
Analysts at BancBoston Robertson Stephens and Salomon Smith Barney predicted the revenue
shortfall late last week, as Dell's stock continued its fall from a Feb. 1 high of $110 to Friday's
close of $89.88.
But Dell management had nothing to say in advance. Chairman and CEO Michael S. Dell
confidently smiled a billionaire's smile on Feb. 9 at Goldman, Sachs & Co.'s annual technology
conference in New York. Playing to an adoring and standing-room-only crowd, Dell spoke of the
company's rich opportunities on the Internet, for leveraging high-speed network connections and
selling into untapped international markets.
''Dell will have an opportunity to grow at significantly more than the industry growth rate,'' the
CEO said.
But he had to know Dell would whiff on the revenue figure. And he said nothing.
Michael K. Kwatinetz, the unrepentant Dell bull at Credit Suisse First Boston Corp., doesn't think
Dell erred in its reticence.
''How granular are we going to get?'' he asks. ''Next there'll be a responsibility to pre-announce
a month's revenues.''
But Thomas J. Meredith, Dell's chief financial officer, repeatedly noted in Dell's downbeat
conference call Tuesday that the fourth-quarter revenue shortfall was a direct result of a failure by
Dell to match prices set in the third quarter by its biggest competitors, particularly International
Business Machines Corp. (NYSE, IBM).
The point was not lost on Kurtis R. King, PC analyst with NationsBanc Montgomery Securities
and another Dell fan, who noted Dell was optimistic just a few weeks ago. At that point it already
had good information on contracts it had lost in the third quarter.
Michael Dell's response, in the teleconference: ''We're confident we can outgrow the market,'' he
said, using the same line from the Goldman performance.
King won't abandon Dell, even when its stock -- which closed down $1.13, or 1 percent,
Tuesday -- falls today.
''Assuming I don't think there's more bad news to come, I probably will stay positive,'' he says.
''Thirty-eight percent sales growth is not a disaster. It's just quite a variance for a company that's
been bullet-proof for three years.''
Incidentally, will anyone notice that Dell announced a two-for-one stock split, its seventh split in as
many years?
''If you think your stock is about to take a huge hit, you don't announce a stock split,'' observes
Howard M. Love Jr., who runs an eponymous hedge fund in Burlingame.
Dell's Meredith flatly stated that ''our confidence is essentially demonstrated (by) announcing the
split of the stock.''
But for the first time in a while, investors will wonder what else is on Dell's mind.
WHEN AN ELEPHANT STIRS: As Dell aims to minimize future revenue boo-boos, it
undoubtedly will look for new sources of revenue. And when big companies hunt for top-line
boosters, investors in smaller competitors should fret.
Dell, in fact, is dropping hints it's about to step up its Web-site sales of new products. A cryptic
note at www.dell.com promises ''A New Shopping Experience'' coming March 3. Michael Dell
and CFO Meredith said the new online store will focus on software and peripherals.
Could this possibly be good for online software retailer Beyond.com Inc. (Nasdaq, BYND),
profiled favorably in this space late last year? Yes, says the company. Especially if Dell or another
PC maker were to choose Beyond.com to run the site.
''We've been talking with all the major (manufacturers) about being the vendor of choice for
post-purchase software,'' boasts Beyond.com President and CEO Mark L. Breier, the former
Amazon.com Inc. (Nasdaq, AMZN) marketing executive who says PC buyers increasingly want
more than the outdated ''shovelware'' box makers pre-install.
Beyond.com already has distribution deals with e-commerce sites like Network Associates
Inc.'s (Nasdaq, NETA) McAfee.com store, Yahoo Inc. (Nasdaq, YHOO) and AutoDesk Inc.
(Nasdaq, ADSK).
Breier won't say if Beyond.com is on Dell's short list. But he suggests that the small company's
large software title catalog, record of innovation and unique digital downloading technology give it
an edge over Dell attempting to go it alone.
''It's very hard to minor in (online software sales),'' says Breier. ''You have to major in it.''
Beyond.com's stock closed Tuesday at $25.13, about 10 percent above its level in early
December but well below its $40-plus peak last month.
Contact Adam Lashinsky at the San Jose Mercury News, 750 Ridder Park Drive, San Jose,
Calif. 95190, or siliconstreet@sjmercury.com or (408) 271-3782.
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