October 31, 2005 3:30 PM PST

Dell's third-quarter earnings slip

Dell announced on Monday that third-quarter revenue will fall well short of expectations due to sluggish consumer sales and a faulty component in its OptiPlex desktop PC.

The Round Rock, Texas-based computer maker said it expects revenue to be about $13.9 billion versus its previous forecast of $14.1 billion to $14.5 billion, a difference of more than 4 percent. Dell also said it will have spent an unscheduled $450 million, or roughly 14 cents per share, on operational issues. This will make its projected third-quarter earnings per share about 25 cents versus the previous estimate range of 39 cents to 41 cents.

The leader in computer manufacturing blames its shortfall partially on sluggish consumer sales in the U.S. and U.K., which recorded revenues of $8.9 billion and $2.9 billion respectively in the previous quarter, which ended in July. Dell fell into similar territory in that quarter's financial earnings report, when it reported it had lost market share in nearly every regional market.

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Dell said more than $300 million of its $450 million charge would compensate for a faulty capacitor--a hardware component that stores power and regulates voltage--found in a small percentage of its previous generation of its GX270 and GX280 OptiPlex desktop.

"The charge also includes the costs of workforce realignment, product rationalizations and excess facilities," the company said.

Dell spokesperson Jess Blackburn said a "small percentage" of Dell's 61,000 employees around the country were laid off as part of a company realignment.

"When companies make explanations for a shortfall in earnings, they take the two or three most obvious things to blame and focus on them so they can simplify the message. But quite frankly, it is usually more complex than that," said independent PC analyst Roger Kay.

Kay points to Dell's 2004 annual earnings call, when the company declared a shortfall of about $10 million in the consumer segment. Founder Michael Dell and CEO Kevin Rollins became defensive, Kay said, after financial analysts pressed them on the shortage.

"Michael Dell basically said, 'Well, if we can't trade them up or sell a monitor, we really don't want that business,'" Kay recounted.

Shortly after that, Dell began publicly talking about its strategy for its higher-prices XPS brand, a luxury line of computers that come with the highest upgrades of processors, hard drives and graphics boards available.

At the time analysts interpreted the move as an indication that Dell--which rocketed to the PC industry's top spot by building an efficient manufacturing operation that enables lower-priced computers--wants to feast on the fatter margins that come with selling snazzier gear.

However, some damage to Dell's sterling reputation may already have been done. The widening gap in PC sales between first-place Dell and second-place Hewlett-Packard took a turn in the third quarter of 2005. HP grew shipments slightly faster than rival Dell, according to recent analyst reports. Gartner reported that HP experienced 17.1 percent growth between July 1 and Sept. 30, while Dell grew shipments only by 17.8 percent, nearly the same as the market overall. For Dell, that's slow.

Apple Computer, Acer and Gateway also posted gains in the same time frame. Lenovo was the only major PC maker whose market share slipped. The Chinese company, headquartered in the U.S., saw shipments rise slightly less than the market as a whole--by 13.1 percent--taking into account the merger with IBM's PC unit.

Dell executives have scheduled a conference call for mid-morning Tuesday to explain more about the third-quarter shortfall. Joining the call will be executives from Intel and Microsoft to discuss their strategic relationships with Dell.

Investors are expected to also ask questions about Dell's other businesses, such as printers, digital displays and televisions, to check the health of the overall company.

Dell reports its quarterly earnings on Nov. 10.

In after-hours trading, shares of Dell stock dipped 5 percent to $30.25. Earlier in the day, the company's stock gained 82 cents.

 

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