Dell profit drops as prices fall amid PC price war

Caroline Humer

NEW YORK: Dell Computer Corp. said on Thursday third-quarter net income fell

36 per cent as the No. 1 maker of personal computers waged a price war amid

dismal corporate demand and took market share from its rivals.

Dell, which builds computers to order, said it would continue to gain against

competitors in the fourth quarter, forecasting that sales would rise slightly

over third quarter levels as industry-wide revenue falls.

The Round Rock, Texas-based company said net income fell to $429 million, or

16 cents per share, from $674 million, or 25 cents per share, in the

year-earlier period. Analysts had on average expected earnings per share of 15

cents, according to research firm Thomson Financial/First Call.

Dell's profits come in stark contrast to the PC operations of rivals such

Hewlett-Packard Co. and Compaq Computer Corp., which have suffered amid stagnant

PC demand, weak corporate spending on technology and an economic slowdown.

Dell said sales to government customers and consumer increased while

education sales fell and demand from corporate customers remained weak, but its

margins were stable.

"You see these results and it has to be fairly eye opening for Compaq

and Hewlett-Packard, because they were down very, very sharply in their PC, or

Intel-based, business," said J P Morgan analyst Daniel Kunstler.

"Here you have Dell that says, 'Yes, there's a macro problem, but we

haven't let that affect the operating model of the company,'" Kunstler

said.

Some see a disappointing forecast



Looking ahead, Dell founder and chief executive Officer Michael Dell said the
company sees fourth-quarter earnings per share at 16 cents. Analysts expected

earnings of 16 cents per share, according to Thomson Financial/First Call.

Michael Dell said Dell sees opportunity in geographic expansion, where it has

less share than in the US In addition, he sees demand from consumers and

corporations for upgrades around the corner.

"In consumer, the convergence of Windows XP, Pentium 4, low-cost

broadband and wireless networking is creating a feature nucleus for a new

upgrade cycle," Dell said. "The replacement cycle driven off Year 2000

spending and the postponement of upgrades this year, will have a strengthening

effect on demand. We estimate that more than 164 million systems in the

installed based will be more than 3 years old at end of 2001," he said.

Dell shares have risen about 59 per cent this year, while the American Stock

Exchange Hardware Index has lost 28 per cent. Dell ended slightly higher in

Thursday trading on the New York Stock Exchange ahead of the earnings

announcement, closing at $27.69. In trading after the close, they fell to

$27.55.

While the just-completed quarter was strong, some analysts noted that the

guidance is disappointing, because Dell's forecast implies only a small boost

from holiday shopping in the fourth quarter, traditionally the industry's

strongest.

In addition, the introduction of Microsoft Corp.'s Windows XP had been

expected to boost sales.

"That pickup you were hoping for got shoved out," said Lehman

Brothers analyst Dan Niles. "They're killing their competitors in every

product category and every region, but the problem here is you're gaining market

share in a shrinking market."

Before Dell's guidance, analysts had forecast Dell's sales in the fourth

quarter, which ends in January, at $7.75 billion.

Third-quarter sales were $7.5 billion, within the range the company had

targeted in August when it told analysts to expect revenues that would be flat

to down 5 percent from the second quarter's $7.6 billion. Compared with a year

ago, sales fell 10 percent from $8.26 billion.

Dell's sales fell more slowly than the rest of the industry, indicating that

Dell took share from its competitors, including Compaq and Hewlett-Packard,

which plan to merge, and Gateway Inc.

In addition, the lower sales came as Dell's unit shipments rose by two per

cent from the second quarter and average selling prices fell by a few percentage

points, Chief Operating Officer Kevin Rollins said. The company will maintain

its aggressive pricing strategy into the fourth quarter, he said.

"Given the very tough pricing environment, this isn't half bad,"

said Kunstler, referring to Dell's results. Still, Rollins said the outlook for

a rebound in the PC market remains unclear.

"We don't see any change really in the corporate market in terms of a

big demand uptick. There's obviously a potential for consumer uptick in Q4 but I

think for any overall market turn next year, it's still too soon to call,"

Rollins said.

(C) Reuters Limited.