Dell Posts Slower Revenue Growth

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Computer direct marketer Dell Computer Corp., Round Rock, TX, said it has taken steps to address the problems that led to its fourth-quarter revenue shortfall, which resulted in a more than 20 percent decline in its stock during the past two weeks.


The company, which became a technology titan with its ability to keep prices low by eliminating a layer of distribution between itself and consumers, said it had not priced its products aggressively enough early in the period. A Dell spokesman said the company realized its mistake early in the quarter and lowered its prices, but, he said revenues for many of the resulting orders were not realized immediately.


Analysts, meanwhile, said the phenomenal growth rates that had propelled Dell's stock during the past several years were bound to slow eventually.


"If it had been any other company in the world, it would have been an astonishingly good quarter," said Charles R. Wolf, an analyst with Warburg Dillon Read LLC, New York. "It is only because the expectations had been so inflated, that the reaction has been what it has."


Dell reported $5.17 billion in revenues for the fourth quarter, up 38 percent over revenues of $3.74 billion in the fourth quarter of the preceding year, but short of some projections by about $300 million. Net income for the quarter, which ended Jan. 29, was $425 million, or 31 cents per share, an increase of 49 percent over net income of $285 million, or 20 cents per share in the year-ago fourth quarter. The 31 cents per share in net income met analysts' expectations, but because profitability was achieved by boosting efficiency rather than increasing sales, it was a disappointment, analysts said.


Dell said its board of directors has authorized a two-for-one stock split, to be issued on March 5.


Early news about the possibility of a revenue shortfall in the fourth quarter had driven the stock down by more than 10 percent to under $90 in the days before the Feb. 16 earnings release, and the stock fell even more after the announcement. Other computer-company stocks, including IBM, Gateway, Compaq and Apple, fell in sympathy. Dell's shares fell to as low as $77.38 in the morning after it announced earnings, although it recovered some of that loss later in the day.


Analysts were optimistic about the company's future, however. Wolf said he felt Dell's direct-marketing business model would continue to give the company an edge over its competition, although he did not expect that Dell would be able to return to the pace of the preceding nine quarters, when growth rates exceeded 50 percent.


"They are already, on a run-rate basis, over $20 billion in revenues," he said. "It's hard for any company that has $20 billion in revenues to add $10 billion in a year."


T.R. Reid, a Dell spokesman, said the company had won a high percentage of bids with large business customers in the fourth quarter, and the revenues from those contracts would be realized throughout the year and in years to come.


Both he and Wolf downplayed reports that competitors such as Compaq, IBM and Hewlett-Packard had made serious inroads into Dell's direct-to-consumer turf.


"What most companies are trying to do is replicate parts of what we do in parts of their business, in effect, at best, creating a direct-indirect hybrid model," said Reid. "The fundamental difference is that we own the relationship with the consumer, and you can do a myriad of things more effectively if you own the relationship with the consumer."


The company said it was generating more than $14 million a day in sales from its Web site (www.dell.com) and during the fourth quarter the site received 25 million visits, generating $1 billion in sales.


Dell said it was able to increase its operating margins to 11.4 percent of sales for the quarter, up from 10.6 percent in the year-ago quarter, by lowering its operating expenses. It also achieved a record six days of inventory in the quarter, which translates to about 61 inventory turns a year, another indication of its ability to operate efficiently.


Net income for the recent full year was $1.46 billion or $1.05 per share, a 55-percent gain over net income of $944 million or 64 cents per share in the preceding year. Revenues for the full year were $18.24 billion, up 48 percent over revenues of $12.33 billion in the preceding year.
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