Dell dives on growth concerns
Shares drop 10% on heavy trading volume
By Cecily Fraser, CBS MarketWatch
Last Update: 4:51 PM ET May 19, 1999
Movers & Shakers
Earnings Headlines
ROUND ROCK, Texas (CBS.MW) -- Wall Street pummeled shares of Dell
Computer Wednesday after the high-tech bellwether reported first-quarter
earnings that failed to exceed expectations, prompting analysts to question
the company's growth prospects.
Dell's shares fell 4 1/4, or 9.6 percent, to 39 13/16, helping to send the
Goldman Sachs Computer Hardware Index down 2.5 percent. More than 65
million shares changed hands, almost three times the daily average.
The personal computer maker said profits rose 42
percent in the quarter to $434 million, or 16 cents a
share. That was in line with the consensus estimate of
analysts surveyed by earnings research firm First Call, but
not good enough for analysts.
"When Dell meets expectations, that's less than
people expect," said Roger Kay, a research manager
at International Data Corp.
In the year-ago quarter, Dell earned $305 million, or 11
cents a share, on revenue of $3.9 billion.
Charlie Wolf, an analyst at Warburg Dillon Read
sliced his rating on Dell's stock to "hold" from "buy," saying that the PC
maker is no longer delivering upside surprises.
A few other Wall Street analysts reacted by cutting their earnings estimates
as well. U.S. Bancorp Piper Jaffray analyst Ashok Kumor lowered fiscal 2000
and 2001 estimates to 69 cents and 93 cents a share, from 76 cents and $1,
respectively.
Top line: $5.5 billion
For the recently completed quarter, revenue was $5.5 billion, up 41 percent from $3.9
billion in the year-earlier quarter. Sales via the company's Web site surpassed $18
million per day during the quarter, accounting for 30 percent of overall revenue, the
company said.
The company's guidance for sequential revenue
growth was 5 percent in the second quarter, or 35
percent year-over-year. "This is the lowest
year-over-year growth in more than four years," said
BancBoston Robertson Stephens analyst Dan Niles
in a note. "We believe that Dell is at the crossroads of
growth or profitability, but not both."
Wall Street analysts also expressed concern on news that
Dell's gross margins, or the amount of money earned per
dollar of revenue, fell to 21.5 percent from 22.4 percent in
the previous quarter due to the squeeze of an
aggressive PC pricing environment.
"We were surprised at the magnitude of this quarter's
gross margin...decline," said Richard Gardner,
analyst at Salomon Smith Barney, in a research note.
"We view this as a sign of increasing competitive
pressure."
Meanwhile, revenue from enterprise systems, including
network servers, workstations and storage products, soared 97 percent from the
year-earlier period. "Industry demand was solid during the first quarter, and we
once again achieved industry-leading results," said Chief Executive Officer Michael
Dell.
While the Round Rock, Texas-based company posted growth that was
greater than the industry's overall rate in several areas, European sales
slowed to 29 percent on a year-over-year basis. During a conference call with
analysts, CEO Dell said he had hoped for higher growth in Europe.
Dell said the company accelerated growth in the Asia Pacific region, led by
"exceptional" results in China. Revenue in that region rose 48 percent.
Meanwhile, Dell's North American sales rose 45 percent year over year,
driven by increases in sales to consumers and small businesses, the
company said.
Still more Net focus
The CEO said the company continues to expand its Web-based business, a topic of
much discussion among Dell's peer group recently. IBM and Hewlett-Packard have
both unveiled plans lately to expand business on the Internet.
Dell said it will increasingly apply the Internet to its entire
business, from component design to end-user support.
"It's hard to overstate the importance of the Internet," the
company said.
"The Internet has given the computer hardware
industry a way to get immediate feedback from the
customer," said David Soetebier, senior analyst at Bank
of America Investment Management in St. Louis, pointing
to Dell's Web sites for corporate, government and
education customers. "The Internet should improve
inventory turns and reduce markdowns."
Dell said its Internet revenue in the first quarter was
more than triple that in the year-ago period.
Further defusing the Compaq effect
Soetebier said that Dell's earnings should help to alleviate the fear in the computer
hardware industry that heightened when Compaq Computer (CPQ: news, msgs)
reported that a sales slowdown in the industry took a bite out of its first-quarter
earnings, ultimately bringing about the resignation of its chief executive officer.
"Compaq blamed their earning problems on the industry, when in fact it turned out
to be an internal problem," said Soetebier. "Since then, the market has seen
favorable results from Hewlett-Packard and IBM, showing that the companies that
are executing properly are still doing well."
Analysts reported that Dell advanced to the No. 2 position in worldwide
market share, as the company's business grew about two and a half times
the estimated industry rate.
"For companies with effective business models, this industry remains
healthy," CEO Dell said. "We continue to see significant opportunity for
expanding business profitability."
Cecily Fraser is a reporter for CBS MarketWatch.
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