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Dell warns on 4Q profit
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January 26, 2000: 4:25 a.m. ET
PC maker also foresees a slowdown in growth in coming year
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Dell Computer Corp. warned Wednesday that its profit and revenue for the quarter ending Jan. 28 would fall short of expectations, as a parts shortage and a slowdown in corporate spending took a bite out of sales and earnings.
The Round Rock, Tex.-based PC maker said earnings for the fourth quarter of fiscal year 2000, should total about $430 million, or 16 cents per diluted share, including a penny per share from investment gains. First Call's analyst consensus forecast had been 21 cents per share.
Dell said it expects to report revenue of roughly $6.7 billion for the period, which is up 30 percent from the year-ago quarter, but still well below what most analysts were forecasting.
The warning, the company's second in as many quarters, sent shares of Dell tumbling more than 9 percent to 35-5/8 in after-hours trade. Ahead of the news, Dell closed at 40-3/8, down 1-3/4.
Click here for an after-hours quote
The company plans to report its results for the quarter on Feb. 10.
Y2K bug takes a bite out of sales
In a conference call, Dell executives blamed the shortfall largely on lower-than-expected sales to large corporate customers, who deferred spending ahead of the new year.
Most large corporations implemented technology spending lockdowns ahead of the year 2000 date change to avoid the so-called Y2K problem, which many thought could disable computer systems because they would not be able to distinguish the year 2000 from 1999.
While Y2K turned out to be largely a non-event, Dell's customers did not start spending again as quickly as the company had expected. That reduced anticipated quarterly revenue by roughly $500 million, according to Meredith.
"The rebound in January simply did not happened," he said. "We just misjudged the speed with which large corporations would begin their post Y2K installations."
Dell executives also said they expect the residual effects of Y2K to carry over into the first quarter of fiscal year 2001, which begins Jan. 29.
"A lot of the larger customers are looking at the end of February before major rollouts start taking place," said Michael Dell, the company's chairman and chief executive. "We don't know exactly at what rate the turn-on is going to go, but it looks like February is not going to be tremendously strong for the industry."
Chip shortages weigh heavily
A shortage of key semiconductor components, particularly on the high-end, also dragged down the company's top line, resulting in roughly $300 million in lost sales, executives said.
The chip shortages also affected other computer makers during the quarter. Last Week, Dell rival Gateway (GTW), which issued an earnings warning of its own, posted earnings that were 2.4 percent lower that a year ago, blaming the decline primarily on a shortage of microprocessors from Intel (INTC).
"Most of these issues have now been resolved," Meredith said. "This gives us confidence going into the next quarter, but it happened to late to help us during the current quarter."
The shortages occurred as component makers shifted to a more advanced manufacturing process technology, according to Dell.
"The transition was not executed well by a number of our partners," he said.
Component shortages tend to hurt Dell and Gateway more than some other computer makers, because they operate on a build-to-order model and typically order components as they need them.
Shortly after Dell released its warning, Hewlett-Packard (HWP) said it is on track to meet its fiscal first-quarter targets.
"In view of recent announcements by some of our competitors, we felt it was appropriate to reaffirm revenue and earnings growth guidance in the 12 percent-to-15 percent range for the full year, and that our first quarter is in good shape," Robert P. Wayman, HP's chief financial officer said in a statement.
Analysts are expecting HP to post a profit of 77 cents per share during the quarter.
Growth to slow in 2000
Executives also guided analysts toward a slower growth rate as the company itself grows in size.
The company said it is aiming over the next fiscal year for annual revenue growth in the low 30-percent range, with net margins in the low to mid 7-percent range. Over the past year, Dell's revenue growth rate was roughly 40 percent.
"We're trying to set more reasonable goals and more realistic goals, and ones that we think you are more comfortable that we are going to meet," Meredith said.
And that outlook could have more of an impact on the company's stock than the quarterly sales and earning stumble, analysts said.
"I would say that the stock is going to open appreciably lower, maybe in the mid-30s, said Charlie Wolf of Warburg Dillon Read in New York.
"If the company said it was a one-quarter event, then I think the downside would have been limited," Wolf added. "But given the guidance we received, which is that growth is likely to slow because the company is so large, that will ratchet down the numbers for fiscal 2001, and that's probably where the damage is going to come from."
While some market observers may have been caught off guard by Dell's announcement Wednesday, others to some degree saw it coming.
Earlier this month, Merrill Lynch analyst Steve Fortuna pointed to a potential shortfall for Dell's fourth quarter, although he noted that the results would likely be hurt more by how well management could fine-tune its pricing so as to rebuild gross margins.
"What I was expecting was a lot of weakness on the gross margin side, but that the revenue line would be reasonably decent," Fortuna said. "What it looks like here is the whole thing, top to bottom, is going to be quite weak."
In his report on Dell, Fortuna had pegged a revenue estimate of $7.12 billion for the quarter.
In a research note he sent to clients on Monday, Robertson Stephens analyst Dan Niles said he expected Dell's fourth-quarter revenue to come in at roughly $7 billion.
Niles, who had assigned a long-term "accumulate" rating on the company, also forewarned of a potential slowdown in Dell's growth rate.
"We believe that the long-term growth rate for revenues is probably closer to the mid-30s, versus about 40 percent" Niles said in his report.
"Though we believe Dell can outperform the Nasdaq in 2000 after a poor 1999, we believe this can only happen after expectations have been reset to more reasonable levels," Niles added. "We believe downside on the stock is to the high $30s. We remain on the sidelines until then." 
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