Dell Warns on Second-Quarter Earnings

Updated: Aggressive prices hurt the company's revenue and profit.

Dell on July 21 issued a de facto earnings warning, stating that aggressive PC pricing in a slowing commercial market worldwide will cause its second-quarter earnings to be lower.

The Round Rock, Texas-based PC maker said that its second-quarter fiscal year 2007 results would yield about $14 billion in revenue and earnings per share in the range of 21 cents to 23 cents, lower than its first-fiscal-quarter results of $14.2 billion and 33 cents a share, reported on May 18. The announcement sent Dells stock reeling. It had fallen by about 13 percent at midday on July 21.

Dell no longer gives specific quarterly revenue and earnings-per-share guidance. Instead, it comments on big picture trends that influence its performance in the long-term. However, it did say on May 18, when it reported first-quarter earnings, that it expected second-quarter results to be "similar" to its first-quarter financials.

"All of our initiatives are focused on providing the best value, experience and products to customers every day, which will maximize shareholder value over the long term," said Dell CEO Kevin Rollins in a statement issued by Dell.

But the long-term trend that may be affecting Dell now is competition. IT managers and analysts report that extremely aggressive PC prices are being offered in large corporate bids. The competitive environment is seeing PC makers drop prices in the bids, thus sacrificing profits, in order to win or keep customers in the face of slowing PC shipment growth.

IDC and Gartner, for example, each predict that 2006 PC unit shipments will rise by less than 11 percent in 2006 versus a gain of about 16 percent in 2005.

Meanwhile, Dells chief rival, Hewlett-Packard, has become stronger, meaning that competition between the vendors appears to be exacting a greater toll on Dell, said Roger Kay, principal analyst at EndPoint Technologies Associates, in Wayland, Mass.

"Basically [Dell is] competing toe-to-toe with HP and thats hurting [Dell], obviously, on the margin side," Kay said.

HP has gotten its costs in line, helping it offer lower prices. Dell still claims an advantage on distribution, given that it sells direct and thus doesnt incur costs working with resellers. However, in consumer-driven markets, working with retailers can be an advantage, Kay said.

"I think basically [Dells] competitive advantage has largely dried up," Kay said.

If so, that makes it harder for Dell to go head-to-head with HP on price without taking a hit on profits.

Rollins pledged on May 18 to invest millions in improving customer services and new products in an effort to return to customers good graces after suffering a disappointing first quarter.

Dell subsequently launched an initiative to do away with rebates and cut back special offers in order to present small business customers and consumers in the United States with more straightforward pricing.

/zimages/2/28571.gifClick here to read more about Dells simplified PC pricing scheme.

Dells CEO also pledged to use the companys business model to lower prices in an effort to return to its traditional patterns of growth. Dells unit shipment growth generally outpaces that of the overall market, quarter-to-quarter. However, it was unable to outgrow the market in the first quarter of 2006, according to IDC.

The PC maker returned to a pace that outgrew worldwide PC shipments in the second quarter of 2006. It grew shipments by 10.9 percent during the quarter, topping the market rate of 9.7 percent, according to IDC. Dell delivered a hair under 10 million units in the quarter, giving it the top market share position with 19.2 percent of the worldwide PC market.

Getting there appears to have been costly, but there may be some upside in the future, Kay said.

"Units were right on, revenue was a little light," he said of the earnings warning. "But the fact that the bottom line was out of whack says to me its related at least in part to the investments [Dell is] making right now."

Investments made today yield results tomorrow, Kay said.

"But it looks really bad in the current environment, when its not hitting top-line growth and the bottom line is so bad," he said.

Dells fiscal quarter typically ends one month after the calendar quarter. Thus its second fiscal quarter closes at the end of July. Dell will announce financial results for the fiscal 2007 second quarter on August 17.

Editors Note: This story was updated to include more information and comments from an analyst.

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