Is Dell's sluggish quarter omen for rest of industry?; For first time in 2 years, company's sales growth was less than 50 percent


DELL COMPUTER Corp.'s fourth-quarter earnings report last week sent rumbles through the stock market as the company reported weaker-than- expected sales. Although Dell's quarterly sales rose 38 percent to $5.2 billion, they marked the first time in two years that the company had reported sales growth of less than 50 percent. On Wednesday, shares in Dell tumbled $7.1875 to $81, dragging down a number of other PC maker and technology stocks, as well as the Dow Jones industrial average. Do disappointing sales at the No. 1 direct seller of personal computers for business portend a slowdown in sales throughout the PC industry? Are any fundamental changes under way that could upset the growth in revenue and share price for these companies? Are there industry trends that could benefit or hurt PC consumers and shareholders?

Megan Graham-Hackett

Computer industry analyst, S&P; Equity Group, New York.

We've seen this type of reaction many times before with technology stocks. It's driven, one, by expectations and, second, by concern over whether there are fundamental changes occurring in the industry.

Some of the expectations for revenue growth at Dell were a bit higher than was realistic, though the company has said it could have met those expectations if it had been a bit more aggressive about going after some contract wins late in the quarter.

As for whether there are any fundamental changes occurring in the industry, I think the market overreacted. There are always pricing pressures in the corporate PC market. Some of Dell's competitors have been forsaking profits for contract wins as they go head to head with Dell. That's what Hewlett-Packard has been doing. At the end of the day, though, some of these competitors will find that strategy unsustainable. The main thing that hasn't changed is, Dell is still the model to beat.

What all this means for buyers of PC stocks and buyers of PCs is opportunity. There are much richer computer systems that are affordable to the consumer than ever before in history. The cost of components has really come down, largely as the result of the Dell model which is driving the corporate PC industry right now. PC customers are really winning as a result. PC stockholders also should do well. The industry should continue to see high volumes in sales and should be able to leverage their costs and economies of scale for a better bottom line.

David Stremba

Computer industry analyst, GartnerGroup, San Jose, Calif.

There are two things to keep in mind when you look at Dell. First, they are not necessarily a computer company. They are a distribution channel. In their case, they happen to distribute what they make. Second, they are about four years ahead of the competition in terms of efficiency and being completely streamlined.

Dell's first and foremost priority is unit growth. They will do whatever it takes to achieve that. What happened this past quarter was they cut prices to meet the unit growth goals. What I think this means for the market as a whole is that the first and second quarter of the year will be strong for earnings. But we'll see a softening in the second half of the year.

You can't squeeze blood from a stone -- there are no inefficiencies in the Dell model to cut. Also, competitors are being forced to become more efficient. Dell will continue to face great competition, especially from Compaq, IBM and Hewlett-Packard.

We are all winning from this great competition in this industry. It's forcing the vendors to simply modify and improve their offerings all the time.

I think what the vendors will do now is look for ways to reduce the replacement time -- now about 3 1/2 years -- for PCs. Right now it's a pretty saturated market. In order to speed up the replacement time, they must reduce replacement costs. In the end, this maturing and competition will be good for the consumer.

T. R. Reid

Corporate spokesman, Dell Computer Corp., Round Rock, Texas.

The revenue growth was slower and lower than forecast by analysts, but the earnings-per-share growth was quite strong -- it went up 55 percent. In retrospect, the company feels maybe it could have been more aggressive in terms of prices. But the thing that doesn't show up in the year-end numbers is all of the contracts that were won in the last quarter but haven't actually been filled yet. Our [contract bid] win rate in 4Q was 60 percent. That means our pipeline of orders is pretty strong.

As for fundamental changes in the industry, we don't see anything extraordinary occurring. Competition is always high in this industry.

Pub Date: 2/21/99

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