Investors were left on Friday to grapple with
shaky fourth-quarter outlook, and the stock reflected the uncertainty, moving up and down throughout the session.
Shares of Dell were recently up 30 cents, or 1%, to $29.51.
projected sales of $14.6 billion to $15 billion for the final quarter of the year, with earnings between 40 cents and 42 cents a share. Analysts polled by Thomson First Call had expected $14.98 billion in revenue with earnings of 42 cents a share.
The guidance represents a top-line growth rate of 9% to 11% year over year. That's down significantly from the 17% growth that Dell experienced in last year's fourth quarter.
But for investors, the question is whether the latest growth projections reflect merely a transitory restructuring phase or rather, the company's evolution into a larger, slower-growth company.
A perfect summation of the Street's agnosticism was given in a note by Needham analyst Charles Wolf. "Something's going on at Dell, but we're not sure what," he wrote, lowering his rating on Dell to a buy from a strong buy. Needham has received compensation for investment banking services to Dell within past 12 months.
Dell experienced its slowest growth since the first quarter of 2003. But while the entire PC industry was in a slump at that time, Wolf noted that worldwide PC shipments in September 2005 grew 17%, according to market research firm IDC. Nor has the competitive landscape, Wolf continued, become any fiercer than it has been for the past decade.
"In short," said Wolf, "we simply don't know the reasons for the sudden slowdown."
In a conference call with analysts following the Thursday's earnings announcement, Dell executives emphasized that the 9% to 11% rate of growth was appropriate for a company of its size in the current business environment. But they refused to specify whether this growth rate was a temporary dip -- or reflected the company's new reality.
"For this particular time, this quarter, the guidance we're giving you, we think that's an appropriate growth rate," said Dell CEO Kevin Rollins. "We'll have to talk more about the future in the future."
Earlier this year, Dell laid out an ambitious plan to grow to $80 billion in annual revenue. To reach that goal within the next three or four years, analysts estimate the company needs to grow the top line by at least 13% a year. Rollins said the company is still committed to its $80 billion target, although he declined to provide a timeframe for reaching it.
And not everyone was spooked by the growth cloud. "Clearly,
the fourth quarter is a transition quarter, but we continue to think rumors of Dell's demise are greatly exaggerated and the company should be able to right itself over the coming quarters," wrote Morgan Stanley analyst Rebecca Runkle, whose firm has provided investment banking services to Dell within the past 12 months.
The sentiment was echoed at Credit Suisse First Boston, which maintained its outperform rating on Dell -- albeit with a lower EPS estimate for fiscal 2006 and 2007 to account for the company's operating expenses on a lower revenue base.
In the conference call with investors Thursday, Rollins emphasized the company's commitment to improving the business, citing improvements to its cost structure, new customer support services and its cost advantages at different price points. He confirmed that the company has recently laid off approximately 1,000 employees.
But despite the disappointing third-quarter results, investors found several reasons to keep the faith in Dell.
Sales outside the U.S. were up 20% from the previous year, with China accounting for particularly robust growth. Dell said unit shipments in China jumped 46% year over year while revenue was up 29%, driven primarily by demand in the home and small business sector.
And high-margin segments of the business grew at an impressive clip in the third quarter, with services up 36% year over year and printer consumables up more than 100% year over year.
Storage was up 35% year over year, a rate the company said was more than three times that of the industry.
But the softness in the U.S. and U.K. consumer business, which the company attributed to the quarter's shortfall, is hard to ignore. According to Dell, a dropoff in public sector spending accounted for the shortfall in the U.K.
In the U.S., the company was hurt by consumer sales, which were down 2% year over year. Rollins said Dell spent the third quarter tinkering with its mix of low-end, mid-range and high-end consumer PC offerings. After focusing too much on the low-end in the second quarter, Rollins said the company leaned heavily on the higher-end in the third quarter.
"We're now ready to get back into a balanced position in the marketplace," said Rollins.
Goldman Sachs analyst Laura Conigliaro, however, is not convinced that the shortfall in U.S. consumer and U.K. public sector businesses fully explains Dell's third-quarter miss.
"Dell's results are likely to raise some yellow flags about tech demand," Conigliaro wrote in a note. Goldman Sachs has provided investment banking services to Dell in past 12 months.