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October 10, 1999

Dell to Offer PC Rebates – Says It Will Cut Margins

By CBR Staff Writer

Dell Computer Corp staged a volte-face on Friday by announcing PC rebates to subscribers to Dell.Net, its internet service provider, after previously holding out against the increasingly popular sales tactic. Michael Dell, Dell chairman, said the firm would offer $400 rebates to computer buyers signing up for a three-year subscription to Dell.Net at $21.95 a month. He said the subsidies had clearly become a market factor the firm could not ignore. Dell is treading in the footsteps of PC manufacturers like IBM Corp and Emachines; internet service providers such as CompuServe and Prodigy; and PC retailers like Best Buy and CompUSA, which have led a frenzy of cross-marketing.

Austin, Texas-based Dell sprang the news in a briefing with Wall Street analysts yesterday called to discuss operations in its current (third) quarter, ending October 31. Paul Bell, head of Dell’s consumer segment, said the company would generate better operating margins from the rebates. Margins are actually better for us…because $21.95 a month is way over the cost for an ISP these days. The cost of an ISP has come down tremendously. Bell said Dell would offer rebate customers the opportunity to upgrade to broadband internet services when this becomes available.

Michael Dell said the firm is just starting to reap dividends from corralling the internet into its direct-selling model and that over time the internet could allow it to lop 50% off costs. Dell also used the briefing to address market fears that the firm’s financial performance could suffer from component supply delays following the Taiwan earthquake last month which knocked out key production facilities. The uncertainty has driven Dell’s share price down in recent weeks. He said the Taiwanese computer parts plants damaged in the tremor had quickly resumed production, and that Dell, the world’s second-largest PC seller had pulled rank on smaller rivals to ensure uninterrupted supplier of computer chips.

A Dell spokesperson said: In terms of the [third quarter], I think we’re going to do OK … all of the things we’ve seen so far seem to be addressable through supplier leverage. The spokesperson added: We’re going to squeeze out the little guys and I think we’re going to get the parts we need, ruling out any massive disruption to business. Michael Dell said the firm had targeted four business segments – computer services, global expansion, home and small business consumers and enterprise systems – as growth opportunities, each of which could add $10bn in revenue. Its not hard to see how we could grow from $26bn in revenue, this year, to $50bn or $70bn any number of years out, he said. Dell reported revenue of $18.2bn for the year ended January 1999. Before the briefing analysts tipped the firm to generate $26bn in revenues for the current fiscal year.

Analysts largely stuck to their guns after the briefing, Steve Fortuna, Dell-watcher at investment bank, Merrill Lynch, gave the firm a reasonable chance of meeting expectations for the remaining quarters of 2000 despite the Taiwan quake. Fortuna reiterated Merrill’s $0.20 earnings-per-share estimate for the third quarter and $0.22 for the fourth quarter. Credit Suisse First Boston was also unmoved in its earnings predictions for Dell – like Merrill, $0.20 per-share for the third quarter. But the investment bank did say revenue risked falling slightly behind its 40% growth estimate – in line with prognostications made last week. Dell’s shares closed on Friday at $45.50 – up 2.54% for the day.

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