By Stephen Phillips
Dell Computer Corp turned in third-quarter earnings in line with reduced Wall Street expectations after the number-two PC vendor had tipped off the market last month that profitability would be hit by spiraling memory chip costs and shortfalls of flat panel displays for its notebook PCs.
Dell chief financial officer, Tom Meredith, branded the quarter unusual, citing a 150% hike in prices of DRAMS for PCs and servers, and a shortage of liquid crystal display monitors, through the three-month period to October 29. The factors were primarily caused by September’s earthquake in Taiwan, a major computer-component manufacturing center. Round Rock, Texas-based Dell reported net profits of $483m, or 18 cents a share, up 26% on $384m, or 14 cents a share in the year-ago period, and bang on the consensus of analysts’ expectations collated by financial pollster, First Call. Revenue for the quarter stood at $6.78bn, 41% up on $4.82bn in the corresponding period last year. Factoring in a one-time $194m charge from the write-off of research and development related to the acquisition of storage area network software company, ConvergeNet Technologies Inc, closed during the quarter, earnings were $289m, or 11 cents a share compared to an equivalent of 20 cents a share for the 1998 quarter.
The company said increasing memory costs had crimped its operating profit margin to 9.6% from 11.3% in the year-ago period. Dell said it had introduced different product mixes to offset the price hike, but that a 25% increase just two weeks from quarter’s-end had taken a toll. Meantime, it touted a new partnership with South Koran industrial conglomerate, Samsung Corp, which it said would increase access to notebook PC monitors. Officials would not disclose the terms of the agreement during yesterday’s earnings announcement. Going forward Dell said component costs would no longer uniformly rise but that they may be choppy. Supply will be tight, but we’re well positioned with suppliers, said Meredith. Dell said rival Compaq Corp’s stripped-back iPaq PC, launched yesterday, which will cost up to 19% less than standard desktop machines, would be vulnerable to component price instability because of slender profit margins. Dell said it would launch its own low-end,, so-called web PC, offering a bare-bones operating system and internet access, fairly soon.
Meantime the company appeared to prime journalists and analysts for reduced revenue growth in its current quarter, which will end around January 31. President and chief executive officer, Michael Dell warned of more moderate growth for the period, citing public sector clients which account for 45% of Dell’s sales and are expected to slow or suspend orders through the millennium date change to manage the Y2K computer bug. Earlier in yesterday’s announcement Meredith drew a comparison with last year’s fourth quarter when the company showed only a 7% growth in revenue, from a previous sequential rate of 10%-11%.
Dell said revenue from product shipments in North and South America increased by 49% over the year-ago, more than double the industry average. Asian revenue grew by 69%, with sales in China where the company is into its second year of operations tripled on the year ago. European sales rose by a more modest 22%, but Dell said this was double the industry average in the region. Revenue from workstations, servers and storage products claimed 17% of overall revenue and the company said it had reeled in IBM to claim number-two position in this market, accounting for 15% of orders. Sales of notebook computers rose by 55% twice the industry average rate, even though officials said sales were stunted by the constraint in supply of LCD panels.
Extrapolating from the quarterly figures, Dell, which is ranked the number-one direct seller of PC products in the world, said it now turned over $12bn a year from online sales – accounting for 43% of overall sales. The company has traditionally boasted lower costs margins through selling direct rather than via a designated network of resellers, and chairman and chief executive officer, Michael Dell said the internet was the compelling business tool for its direct-selling model.
The company said $1.1bn flowed through its coffers during the quarter from operations, part of which was used to buy back 15 million shares under Dell’s long-term strategy to repurchase one billion shares. The quarter brought the total number of shares bought to 800m at a cost of $3.8bnCash from operations.
