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Dell's profit alert shakes up investors

Dell Inc, once a corporate symbol of hyper-efficient production and marketing, stumbled again on Friday as it warned that quarterly profits would be 30 percent lower than expected.

The announcement rattled investors, pulling Dell shares down by nearly 10 percent to a five-year low and contributing to the stock market's decline.

The new setback, analysts said, raised further questions about whether the troubles are worsening at Dell, the world's largest personal computer maker, and whether its management can turn things around anytime soon.

"The Dell model is not working as it did in the past," said Charles Wolf, an analyst at Needham & Co, who has a "hold" recommendation on the company.

"Dell has yet to really deal with the problem," he said.

Dell's profit margins and sales growth, analysts note, have been eroding for more than a year. It is more dependent on the US market and on corporate customers than rivals like Hewlett-Packard Co, at a time when international markets and consumer buyers have generated most of the growth in the PC industry.

Dell's profit advantage over competitors is greatest in desktop computers, which it assembles in its own factories. But recently, growth in desktop machines has trailed well behind notebooks, which are all produced abroad, mainly in China and Taiwan.

In the past, Dell could cut prices and gain market share without hurting profit. That was because its model of selling directly over the Internet and 800-phone numbers and its highly efficient management of supplies and production gave Dell a sizable profit margin advantage over competitors.

But Hewlett-Packard, Lenovo Group Ltd (聯想) and others have closed the efficiency gap, and reduced Dell's profit-margin advantage. So when it cuts prices to hold market share, as it did in the most recent quarter, Dell's profit takes a hit.

Dell, analysts said, has also suffered recently from poor customer service and a lag in product development, especially in notebook machines with multimedia features.

"In the spirit of efficiency, Dell cut corners on customer service and product development, and they are paying the price," said A.M. Sacconaghi, an analyst at Sanford C. Bernstein & Co.

The price of the company's shares dropped US$2.19 a share on Friday, to close at US$19.91. A year ago, Dell traded as high as US$41.50 a share.

In its profit warning, Dell said it expected quarterly earnings a share of US$0.21 to US$0.23 on sales of about US$14 billion. That was well short of the forecast it had given a few months ago, of US$0.32 a share on sales of US$14.2 billion. Dell will announce the final results for its second fiscal quarter on Aug. 17.
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