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Dell credibility gap widens
October 6, 2000: 2:15 p.m. ET

Michael Dell reassured investors weeks ago, so what happened?
By Dan Briordy
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SAN FRANCISCO ( - When it comes to assessing the health of Dell Computer business, it's safe to say that Michael Dell is not exactly an unbiased source. Perhaps that's why the high-profile CEO failed to mention two weeks ago that Dell's revenue growth was slowing, after Intel shocked the market with a sales warning.

Or maybe he's just a glass-is-half-full kind of guy. Either way, Wall Street endured the latest in a string of big-time tech warnings when Dell dropped its bomb on Wednesday night, indicating slowing sales and an earnings shortfall for the fourth quarter.

graphicThe company issued a release stating that demand in Europe and the small-business market was weak, and revenues for the third quarter would be 3 percent below expectations. Even worse was the news that the company was not confident the fourth quarter would be much different and predicted that earnings could fall 1 cent or 2 cents short of estimates.

Presumably, the bad news was upsetting to Michael Dell for many reasons, not the least of which was the fact that only two weeks prior, Mr. Dell reassured the investing public that all was well in the PC business, specifically in Europe.

Mr. Dell was quoted in a Reuters article on Sept. 22, the day after Intel's warning, saying "We believe 30 percent [revenue growth] is very achievable," and "We're expecting our business will be up in Europe again in the third quarter, even though the market may not be up."

No shortage of disappointment

Maybe he believed it. Maybe he just didn't know any better. To be fair, it's not unusual for market conditions to change unexpectedly, forcing a company to revise its estimates. But these kinds of changes don't typically come about in two weeks.

And considering that Intel already indicated to the market that there were problems in Europe, this shouldn't have been unexpected either. Regardless, it's not a particularly good sign for Dell, and the stock fell 10.6 percent on Thursday following the warning.

Investors have been turning away from Dell like jilted lovers for months, and the successive warnings from Intel, SCI Systems and Apple Computer have just made matters worse. Since mid-July, Dell has lost more than half its value, tumbling from $53.56 on July 17 to Thursday's close of $25.19, its lowest level since October 1998.

At the heart of the disappointment is a pattern of poor guidance the company has given to the investment community. Wednesday's warning marks the second time this year that Dell has revised its forecast downward.

At the outset of its fiscal year, Dell told analysts that 40 percent growth for the year was attainable. Even though the math didn't make sense -- with growth like that, it wouldn't be long before Dell was bigger than the market itself -- investors bought into it because it was Dell. Not long after, the company revised the number to 30 percent. On Wednesday, they shaved a couple more percentage points off, saying 27 percent was more likely.

Directly responsible

Because of Dell's direct-sales model, the financial community relies heavily on guidance from management. With other PC companies, analysts can look into the various distribution channels to gauge the health of the market, but Dell's statistics are all kept internally. That's a tricky situation for analysts, which is why UBS Warburg analyst Charlie Wolf chose to disregard Dell's guidance early in the year and downgraded the stock in February.

"As analysts we are paid to make anticipatory calls on things, and if all we do is repeat what management says to us, we are not doing our jobs," says Mr. Wolf. "So I don't spend that much time listening to the companies."

As for Dell's once high-flying stock, it is now trading at just 20 times its fiscal 2002 earnings estimates, if those projections can still be believed. Investors must now be wondering if Dell has disclosed everything, or if there may be more bad news yet to come.

Given recent history, it would not be altogether surprising if Dell had to reset that pesky revenue-growth number one more time before the year was over. And if that happened, it would further devastate the stock, not to mention Michael Dell's credibility.

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