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Dell sidesteps downturn, vows to win market share

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CIOL Bureau
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By Jon Herskovitz



AUSTIN, Texas: Dell Computer Corp. executives said the personal computer company was still winning market share from its rivals even though it sees no signs of an economic rebound. Dell Chief Operating Officer Kevin Rollins said following a meeting with financial analysts that the company was no longer counting on any economic improvement this year.



"We are not seeing any evidence yet that there is a pickup," Rollins said. "We had hoped that in the back half of this year ... we would see some improvement. But it is starting to look like that is not going to happen." But Dell said the company will grow by taking customers from its competitors, like Hewlett-Packard Co. "I believe there's a lot of running room for share gain," Chief Executive Officer Michael Dell told financial analysts at a meeting.



Dell waged an aggressive price war last year to become the No. 1 PC maker but lost that spot in May to HP after it bought Compaq Computer. But Rollins said he expects Dell to regain its former leadership position during the third quarter.



While HP and Gateway Inc. are losing money on their PC businesses, Dell is optimistic about profit and revenue growth. The company raised expectations for the current third quarter ahead of the meeting, saying it sees revenue of $9.1 billion, up $200 million from its previous forecast. It also sees earnings of 21 cents per share, up 31 percent from a year earlier.



Positive Tone


Dell's upbeat meeting came at a time when other technology companies are testifying to weak demand. For instance, Intel Corp., which makes microprocessors that are the brains of PCs, said in September it doesn't expect a rebound in computer sales until companies are profitable again. Analysts said that the tone of the meeting was positive.



"So far Dell has shown a remarkable ability to cut costs with their business model. I see them continuing that going forward," said Bill Shope, an analyst at JP Morgan Chase. "It is going to be easier to show margin improvement as the economy recovers, and they have done a great job when it has been slow," Shope said.



Dell said it is working on increasing sales from large businesses, known as the enterprise market, which now accounts for 20 percent of total revenues. There is a cap on the stock's gains as long as the company only meets earnings targets despite beating revenue forecasts, said Marty Shagrin, an analyst at Victory Capital, which owns Dell shares. "We need to see the mix shift toward enterprise actually happen."



Dell Chief Financial Officer Jim Schneider said the company's inventories are at a record low and that Dell is keeping tight control over manufacturing. Dell said it will exceed its target of cutting $1 billion in costs in fiscal 2003.



More acquisitions likely


Schneider told analysts that he expects unit shipments to rise 8 percent to 9 percent in the third quarter from the second quarter, up from the 5 percent to 6 percent increase that Dell previously had expected. After almost two years of slow PC sales, however, Michael Dell offered little hope for a wider rebound in demand. Dell said the company isn't counting on an across-the-board replacement of PCs by companies to spur more sales.



Companies have begun replacing some PCs that have broken, he said, but "it's certainly not a robust kind of upgrade cycle that we saw when the economy was growing at a faster rate." COO Rollins said Dell would continue to buy back shares, although it probably won't use the same type of derivative hedging strategy now in place.



That strategy helped Dell when its stock was rising, but as the stock price has fallen, Dell has had to pay more than the market price for its shares. Schneider said Dell would probably make more acquisitions of service businesses. The company has been expanding in this sector and this year bought a small, private services company.



The expansion is part of Dell's move to expand its revenue base beyond personal computers and larger computer servers, which make up most of its revenues. Last month it announced an agreement with Lexmark International Inc. to make Dell-branded printers and has said it plans to get into the handheld computer market.



Dell shares closed up 2.8 percent, or 68 cents, to $25.32 in Nasdaq trading, while the broader American Stock Exchange Computer Hardware Index was off 2.4 percent. Dell shares have held up relatively well so far this year, falling less than 7 percent compared with a 44 percent drop for the broader index.



(Additional reporting by Caroline Humer in New York)



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