Ouch! Dell warns of 4Q shortfall

Inconsistent flow of key semiconductor components and the Y2K effect was responsible for the shortfall
Written by Larry Barrett, Contributor

What was merely a nasty rumour a couple of weeks ago became a fact Wednesday when Dell confirmed that its fourth-quarter sales and earnings will fall significantly short of analysts' estimates.

Citing an "inconsistent" flow of key semiconductor components, Dell said it will likely post a profit of $430m (£266m), or 16 cents a share, on sales of $6.7bn.

First Call consensus expected the PC maker to earn 21 cents a share in the quarter. Dell shares closed off 1 3/4 to 40 3/8 ahead of the announcement.

It also said a slower-than-expected rebound in sales to corporate and institutional customers related to the Y2K rollover was responsible for the shortfall.

For the year, Dell expects to earn $1.8bn, or 68 cents a share, on sales of $25bn.

While this profit warning might be an unpleasant surprise to some investors, Merrill Lynch analyst Steve Fortuna predicted this announcement on January 14.

Fortuna said higher component costs would erode profit margins in the quarter.

"The fact that Dell has not yet pre-announced to us does not suggest that the quarter is any safer than it was before," Fortuna said in a research note. "Dell continues to face an execution challenge in the fourth quarter due to generally higher component costs across the board."

Fortuna was looking for a profit of 20 cents a share on sales of $7.1bn.

Dell will miss estimates by 6 cents without the one time gain. On a conference call with analysts, CFO Tom Meredith attributed 3 cents ($300m in sales) of the shortfall to chip shortages and the other 3 cents ($500m in sales) to a Y2K spending slowdown.

Meredith said Dell couldn't deliver Coppermine products -- the latest version of Pentium III chip on 0.18 micron with integrated L2 cache -- in volume after introducing them.

"The problems persisted throughout the quarter," said Meredith. "We believe most of the issues have been resolved for the first quarter, but it came too late to help the fourth quarter."

Corporate demand following the Y2K rollover was lower than anticipated, reducing expected revenue by about $500m. The company nonetheless expects its global fourth-quarter sales to corporate and institutional accounts to increase more than 20 percent from the year-ago period, which the company believes is a multiple of the industry rate.

Meredith said the company misjudged the rate customers would begin spending after the new year. "It was a slower rebound than we expected," said Meredith. "We misjudged that totally."

Bottom line: Sales were soft in January and officials said sales were looking soft for February.

CEO Michael Dell said many customers are planning to roll out new systems at the end of February.

Given the conditions, Dell was doing its best to manage Wall Street's expectations. Dell expects to grow in the 30 percent range year over year. Expectations have been lowered by analysts from the 40 percent clip to 35 percent clip.

Some analysts were a bit testy about Dell's spin control. Dell admitted he was playing the expectations game to regain some credibility. "Clearly we're trying to calibrate expectations and get more leeway to manage through these turbulent times," said Dell.

Last quarter, Dell met lowered estimates after issuing a similar profit warning. In the quarter, it made $483m, or 18 cents a share, on sales of $6.78bn.

"While we're clearly disappointed with our operating results, our overall business is healthy and we believe Dell will continue to significantly outpace the revenue and profit growth of our major competitors and of the industry at large," said CFO Tom Meredith in a prepared release.

Dell shares moved up to a 52-week high of 55 in February before swooning to a low of 31 3/8 in June.

Thirty-one of the 36 analysts following the stock maintain either a "buy" or "strong buy" recommendation. Analysts were forecasting a profit of $1.03 a share in fiscal 2000.

Larry Dignan contributed to this report

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