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Dell Delivers a Downer

Updated from May 8

With PC sales slowing, Dell (DELL) will undershoot Wall Street's bottom-line expectations by 5 cents a share, the company warned investors after Monday's closing bell.

Dell said the miss is the result of a decision to cut prices in hopes of accelerating future revenue growth.

Investors quickly headed for the exits in after-hours trading following the news, and continued to do so early in Tuesday's regular session -- the stock was recently off $1.75, or 6.6%, to $24.68.

Shares of other technology vendors closely tied to PC sales, including Hewlett-Packard, (HPQ), Intel (INTC) and Advanced Micro Devices (AMD) were off modestly, but it wasn't immediately apparent if the market will interpret the news as company-specific, or as a sign of a sector-wide demand problem when regular trading resumes Tuesday.

Dell said that it now expects to earn about 33 cents in the first quarter on revenue of about $14.2 billion; it had expected earnings of 36 cents to 38 cents a share on revenue of $14.2 billion to $14.6 billion.

Prior to the announcement, analysts polled by Thomson First Call were looking for a profit of 38 cents a share on sales of $14.52 billion.

Analysts' estimates and the new EPS number cited by Dell both include 3-cents-a-share of stock-based compensation.

If there is a broader selloff, it probably won't extend beyond companies closely tied to the PC business, said Scott Kessler, head of technology sector equity research for Standard & Poor's. The industry is in a seasonally slow period, as some buyers may be postponing PC purchases until Vista, the new version of Microsoft's (MSFT) Windows is available to businesses later this year and to consumers in early 2007.

Dell's apparent intention to sacrifice margins for market share recalls an April note by Citigroup calling on the company to do just that. At the time, the brokerage slashed its price target on Dell's shares to $28 from $37, saying the company must adjust its profitability expectations in order to kick-start growth and market share.

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