Dell's Strategy Does the Trick

Baldwin Louie — Thu, 17 May 2001 15:00:00 -0700

UPDATE Computer maker Dell met analyst expectations for first-quarter earnings Thursday, posting $462 million (17 cents per share) in profits as price cuts helped it pick up market share.

Earnings fell about 1 percent from the year-ago period but rose from $434 million (16 cents) in the previous quarter. Analysts had forecast that the company would report 17 cents per share for the first fiscal quarter, which ended May 4.

"We delivered on the revenue and profit guidance we provided at the start of the quarter," Michael Dell, chairman and chief executive officer, said in a statement. "Along the way, we accounted for 13 percent of the industry's shipments, 16 percent of its revenue and essentially all of its profitability."

The increased sales, fueled by price cuts on the company's corporate computer models, pushed Dell, already the biggest PC maker in the U.S., into first place in the U.S. server market as well as No. 1 worldwide. The average selling price for PCs fell to $2,000 during the quarter from $2,300 a year ago, according to company officials.

Dell's market share is 12.9 percent worldwide, 23.7 percent in the U.S. and 34 percent of the U.S. corporate market, according to market research firm International Data Corp. Executives don't expect to lose their dominance even if competitors start dropping prices. "Once we acquire share, we keep it," CFO James Schneider said in a conference call.

In the U.S., Dell sells 1 of every 3 corporate desktops and laptops, and 1 of every 4 servers, Dell boasted in the conference call. The company's focus is on sales of high-end servers and notebooks and sales outside the U.S., he added.

Revenues for the Round Rock, Texas-based company were $8 billion, up 10 percent from the $7.2 billion a year ago, when earnings were $466 million (17 cents).

Gross margin was 18 percent at $1.4 billion for the first quarter, down 2.9 percent from a year ago; operating margin was $588 million, down 5.9 percent; and operating expenses were 10.7 percent of revenues, down from 11.2 percent in the fourth quarter and 11.9 percent a year ago. The company has $7.9 billion in cash.

Dell said the company's operating expenses as a percent of sales is less than 60 percent of its major competitors, which include Compaq, HP and IBM. "In our view, unless our competitors find a way to cut more than 40 percent of their operating expenses, they will continue to have a serious problem," he said.

For the coming second quarter, Dell is expected to report a sequential revenue decline of between 3 percent and 5 percent, and earnings per share of between 15 cents and 17 cents - "flat at best and slightly down if the market continues to deteriorate," according to Schneider. The second quarter is usually strong in the education market but slower in the corporate market, he added.

In an attempt to streamline its organization, Dell announced earlier this month that it will cut as many as 4,000 jobs and has already cut about 1,700. The company also is requiring most workers to take unpaid time off in the second quarter, a move that mirrors efforts by Sun and Hewlett-Packard.

The moves to improve efficiency will result in a $250 million to $350 million charge for the quarter but is expected to save the company $200 million, according to Schneider.

HP, which announced in April that it will cut up to 3,000 jobs, reported second-quarter earnings on Wednesday of 16 cents per share, a 66 percent drop. Compaq has announced 2,000 job cuts and earnings of 12 cents per share. Also in April, IBM met expectations with its earnings of 98 cents per share, up 18 percent from last year.

Dell stock was up 50 cents at $25.88 after the market close.

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Dell's Strategy Does the Trick