Dell Profits Dip Slightly but Earnings Meet Expectations

DALLAS – Dell Computer Corp., fighting a price-cutting war that it helped start, expects to gain more of the market for personal computers but suffer a decline in second-quarter revenue.

Dell, the world's largest PC maker, said Thursday that it earned $462 million, or 17 cents per share, in its first quarter, down 1 percent from $466 million, or 17 cents per share a year ago.

That matched the consensus forecast of analysts surveyed by Thomson Financial/First Call.

Dell, based in Round Rock with operations in the Nashville, Tenn., area, said revenue was $8.03 billion in the quarter ended May 4, up 10 percent from $7.28 billion a year ago. The company's gross profit margin was 18 percent, even with the previous quarter and down from 20.5 percent a year ago.

Dell warned that softening demand for PCs would cause second-quarter revenue to fall 3 percent to 5 percent and earnings would be flat to down — 15 cents to 17 cents per share, a penny below what analysts were projecting.

Michael Dell told analysts he was confident in the company's aggressive price-cutting strategy, and he predicted the company will profitably gain market share from its competitors. Dell said PC sales growth would pick up as companies replace old machines and because of interest in Intel's Pentium 4 chip and Microsoft's XP operating system.

Analysts are impressed with Dell's ability to squeeze costs out of suppliers, but they are divided over the wisdom of its aggressive price-cutting to gain PC market share.

Vadim Zlotnikov, an analyst for Bernstein, said Dell's PC market-share gains are slowing because competitors such as Gateway Inc. and Compaq Computer Corp. are taking losses to match Dells cuts, especially on low-priced machines.

Zlotnikov predicted that PC sales will continue to grow slowly for the next couple years — a more bearish outlook than Dells — although he said the company would benefit from rapidly improving sales of servers and data-storage gear. Those higher-end devices now account for 20 percent of Dell sales, up from 18 percent a year ago.

Steve Kleynhans, a technology analyst with Meta Group, predicted that computer makers will continue to fight a brutal, price-cutting war for at least another three months, but he said Dell would emerge in stronger position than its rivals.

"The PC business is going to be a pretty rough road for the rest of the year, but with their cost structure they're very well positioned to do well," Kleynhans said. "When you have a good cost structure, it helps you maintain market share and customer loyalty because you can keep prices down."

Although known for PCs, which still account for more than half its revenue, Dell said shipments of its PowerEdge servers grew 50 percent. Dell has also tried to diversify by marketing Internet services such as Web-hosting and business consulting.

Dell has also moved to slash labor costs by laying off 1,700 workers earlier this year and announcing another 3,000 to 4,000 job cuts this month.

Dell laid off about 100 Tennessee workers, or 2.9 percent of its work force in the state, and there are no plans to eliminate more jobs, Dell President Kevin Rollins said in Friday editions of The Tennessean newspaper.

"It's basically over," Rollins said, before adding, "we've learned to never say never."

Dell said that more jobs will come to Tennessee, however, when the company moves its Latitude business notebook computer line from Austin to Nashville later this year, although the company declined to reveal how many workers might be hired.

In trading Thursday before release of the report, Dell shares rose 50 cents to close at $25.88. In after-hours trading, the shares fell $1.