Despite server growth, Dell misses Q4 target

Despite issuing a profit warning last month, Dell Computer Corp. on Thursday announced what it called "strong" fourth-quarter results, due in part to a major increase in demand for its servers, which grew 63 percent. Earlier in the day, the PC vendor said it will lay off 4 percent, or 1,700, of its full-time staff as a cost-cutting measure. Dell doesn't expect to announce any more across-the-board layoffs over fiscal 2001, Kevin Rollins, one of Dell's two vice chairmen, said during two conference calls for press and financial analysts Thursday afternoon. The across-the-board job cuts announced earlier Thursday were the first ever for Dell, he explained, adding that the company made them as soon as it felt the impact of what he termed a global recession.

"We will continue to drive out redundant costs and further streamline our supply chain," Michael Dell, Dell chairman and chief executive officer, said during the call-in with financial analysts. He didn't provide specific details on what future cost-cutting measures might entail.

For the period ended Feb. 2, 2001, excluding a one-time pre-tax charge of US$105 million equally split between job cuts and the consolidation of certain facilities, Dell's fourth-quarter net income was $508 million, while earnings per share were $0.18, at the low end of its revised estimates announced on Jan. 22. Net revenue was $8.7 billion, which was in line with its expectations, Dell Chief Financial Officer James Schneider said. "The charges will save us around $100 million in the coming year," he added.

Twenty-one brokers polled by First Call/Thomson Financial predicted that Dell would report fourth-quarter earnings per share of $0.19, meaning that Dell missed the street's estimate by a penny. The company did manage to beat analysts' revenue forecast of $8.45 billion.

"Industry demand was far softer than anyone expected when we entered the fourth quarter, but the inherent advantages of our business model helped us grow more than four times faster than the overall rate," Michael Dell, said in a company statement. In spite of the slump in PC demand, Dell said his company has managed to avoided piling up excess inventory and instead has reduced inventory to five days of supply. The five-day inventory level is the lowest in Dell's history, according to Schneider.

Like other IT companies, Dell's bottom line has been hard hit by a slump in demand for PCs as a result of a slowdown in the global economy.

Last month, Dell joined many of its peers when it issued a profit warning concerning its fourth quarter. At that time, Dell said it expected fourth-quarter earnings per share of between US$0.18 and $0.19 as compared with its previous estimate of $0.26, while revenue would be between $8.5 billion and $8.6 billion, down on its earlier forecast of $8.7 billion. Michael Dell committed the vendor to continuing its cost-cutting measures. Turning to fiscal 2001 as a whole, excluding nonrecurring charges, Dell announced net income up 24 percent to $2.3 billion or $0.84 per share on revenue of $31.9 billion. Analysts had been expecting 2001 earnings of $0.85 per share and revenue of $31.8 billion, according to First Call.

Looking ahead to Dell's first quarter, brokers polled by First Call estimate flat earnings per share growth and revenue of $8.45 billion. Schneider said he expects Dell's first-quarter revenue to be around $8 billion, an 8 percent sequential decline compared to the fourth quarter, while earnings per share should be $0.17. He refused to give any guidance about fiscal 2002 as a whole, citing the continued uncertain economic conditions.

"We're bullish about our competitive position in the market and our future growth," Michael Dell told financial analysts. "In the fourth quarter, we built momentum while our competitors lost momentum." Both Dell and other executives claimed that the vendor's direct sales model has been key in helping it stay profitable in the challenging economic times.

Dell is seeing a "significant redirection" in its energies, focusing even more on its key enterprise market, according to James Vanderslice, the company's other vice chairman. "In fact, all our increases in R&D (research and development) are in the enterprise space," he said. Michael Dell added that the main goal for his company going forward is to become the number-one computer vendor in the enterprise market. The key growth areas for the vendor are open systems servers and storage technologies, he added.

Dell includes in its enterprise business its servers, workstations and storage products. The segment's combined revenue rose 42 percent in the fourth quarter compared to a year ago. High-density rack-mounted server revenue more than tripled to account for over 40 percent of Dell's server revenue, Vanderslice said. Workstations grew by 50 percent, while Dell's mobile computing business rose by 45 percent, according to Schneider.

The company is steadily moving up the enterprise chain toward selling more high-level servers, Vanderslice said, pointing to a 73 percent increase in sales of Dell's 8-way servers in the fourth quarter. "We're gobbling up market share across the server space," he said.

Looking at the split of Dell's business, over 50 percent of its fourth-quarter sales and more than two-thirds of its operating profits came from enterprise products, notebook computers and services, Dell's CFO Schneider said. He expects that percentage to reach 60 to 70 percent of total revenue over the next few years.

On a regional basis, Dell claimed it performed well in the Americas with overall fourth-quarter revenue up 27 percent on the year-ago quarter. Sales to U.S. consumers rose 46 percent and Dell's online consumer sales increased by over 160 percent over the December holiday period, contrasting sharply with the slump other PC vendors have reported.

In EMEA (Europe, the Middle East and Africa), where Dell has had challenges in the past, revenue grew 23 percent, with server shipments rising by close to 80 percent in the UK "Europe showed signs of a solid recovery," Schneider said. The company did well in Asia-Pacific, including Japan, where revenue in the fourth quarter increased 51 percent.

Dell Vice Chairman Rollins estimated the vendor currently derives 70 percent of its total revenue from the Americas, with the other 30 percent coming from its international operations. The company is very keen to change that balance and raise its overseas business, he said.

The layoffs announced earlier Thursday will largely impact Dell's administrative, marketing and product support staff at its central Texas locations, with company employees in the company's international operations being unaffected. Dell released its results after U.S. financial markets closed for the day. The company's shares ended regular Thursday trading at $25.0 , up 8.9 percent on Wednesday's close.

Dell, based in Round Rock, Texas, can be reached at +1-512-338-4400 or via the Internet at http://www.dell.com/.