The Day Ahead: Dell tries Wall St. balancing act

Dell is playing a dangerous game with Wall Street. Does AMD gain?
Written by Larry Dignan, Contributor

After its second profit warning in two quarters, the company is trying to talk down analysts' expectations while still looking like the cream of the PC sector.

Dell said it would report a fourth quarter profit of 16 cents a share, including an investment gain of a penny a share. First Call consensus was 21 cents a share.

The company blamed "a slower-than-expected rebound in sales to corporate and institutional customers related to the Y2K rollover" and an "inconsistent flow of key semiconductor components" for its problems.

The warning did not surprise a few analysts. A handful of analysts said slowing corporate sales could hurt Dell's quarter, but Wall Street didn't expect this.

On a conference call with analysts, CFO Tom Meredith attributed 3 cents ($300m or £156m in sales) of the shortfall to chip shortages and the other 3 cents ($500m in sales) to a Y2K spending slowdown.

Bullish investors would argue Dell's problems were one-time glitches out of its control. Many analysts, however, were a bit testy and questioned why Dell didn't see the Y2K troubles coming.

Those questions put Dell on spin control. On one hand -- Dell went with the blame it on Intel defence.

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."

Dell fell into a position where it couldn't deliver the systems it was advertising heavily in the fourth quarter.

The other issue was a Year 2000 spending slowdown. 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."

And then Dell hit Wall Street with its short-term outlook. Sales were soft in January and officials said sales were also looking soft for February. CEO Michael Dell said many customers 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. In the last year, analysts have cut growth expectations from 40 percent to 35 percent.

Analysts didn't want to hear about 30 percent annual growth and a "broader comfort zone" and "more reasonable goals" for expectations. Officials were looking for "sustainability and predictability" and analysts were looking for the glory days.

CEO 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. "This is two quarters in a row we've had to deliver unpleasant news."

Is Dell's bad news good for AMD?

Advanced Micro Devices has to be smiling about Dell's Intel defence.

If Dell's "inconsistent flow of key semiconductor components" sounds vaguely familiar, it is. Gateway said just about the same thing a few weeks ago when it issued a profit warning.

Gateway quickly ran back to AMD so the PC vendor would have another supplier of chips. The move was especially interesting since Gateway had dumped AMD when the chip maker was struggling. Now AMD is looking like a champ.

Dell is the lone PC maker not working in some fashion with AMD.

Would Dell change its stripes? CEO Dell said the company "is always evaluating alternatives," but said it wasn't likely to change its supplier ties to Intel. Dell, however, admitted that lack of fast Intel chips hurt sales.

Dell should at least consider hopping on the Athlon. Landing Dell would be the ultimate coup for AMD.

If Dell is serious about regaining its past glory it should do what it can to alleviate shortages. And that could mean running to AMD. Who would have thunk it?

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