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Wed, May 10, 2006 - Page 10 News List

Dell warns of lower earnings

STEMMING THE DECLINE Chief of the world's largest PC maker said in a statement that quarterly earnings would be lower after it cut prices to prevent a loss of market share


Dell warned on Monday that its quarterly earnings would be lower than expected, a result of price cuts aimed at stemming the decline in its market share for personal computers.

The company now expects to earn US$0.33 a share, including US$0.03 a share in stock option expenses, in the quarter ended April 30, down from a forecast almost three months ago of US$0.36 to US$0.38 a share. It also said on Monday that revenue would be about US$14.2 billion, at the low end of its previous forecast of 6 percent to 8 percent growth.

Though Wall Street analysts saw that Dell was struggling, the degree to which earnings were affected by price cuts took investors by surprise. Dell's shares fell 6.02 percent in after-hours trading, to US$24.84, the lowest level in more than three years.

The company gave few details of what went wrong in the period, its first fiscal quarter, other than to suggest the effects of aggressive price cutting in the latter half of the quarter meant to drive future sales growth.

A statement quoted Kevin Rollins, Dell's chief executive, as saying, "During the first quarter, we continued to execute on our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments."

The company will report its earnings on May 18.

"There were signs that Dell was getting more aggressive," said A.M. Sacconaghi, senior research analyst at Sanford Bernstein.

Dell's problem is one it has been struggling to solve for almost a year. While it tries to maintain the growth in computer sales that its investors have come to expect, it has had to cut prices and trim profit margins. When it tries to improve those margins to please Wall Street, it loses market share. The strategy that worked so well in the past -- cut prices and dare the other PC makers to follow -- does not seem to be working as well.

The problem is most obvious in the market share data. Gartner, the market research firm, said that in the first quarter, Dell lost market share for the first time since Gartner began tracking PC data in 1989. Charles Smulders, a Gartner analyst, said Dell's worldwide PC market share slipped to 16.5 percent in the first quarter from 16.9 percent in the same period a year earlier.

But the real damage was in the US, where market share slipped to 29.9 percent in the quarter from 32 percent a year earlier, according to Gartner. While the overall market grew 7.3 percent, Dell's sales grew only about 2 percent, Smulders said.

Dell is, however, still the world's largest PC maker.

Sacconaghi estimated that operating profit margins slipped to 7.3 percent from 8.2 percent the previous quarter.

"Historically, they have been stable," he said.

Hewlett-Packard has, meanwhile, gained market share worldwide and in the US. Hewlett has been able to cut its costs in the last year, starting to diminish one of Dell's historic advantages.

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