Dell's Earnings Call: Ouch, That Hurts!

The company is clearly off to a slow start, but Seymour still thinks Dell will triumph in 2000.
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Audible pain on the

Dell

(DELL) - Get Report

call this evening. Dell's going to miss the

First Call/Thomson Financial

consensus earnings estimate by a nickel -- 16 cents vs. an estimated 21 cents.

Ouch

.

Dell said there were two main reasons for the shortfall: increasing component costs (in part due to component shortages, and consequent expensive filling-in with substitute parts), and, in CFO Tom Meredith's words tonight, "the Y2K issue: The expected rebound in January simply hasn't happened."

Tech Savvy:

TSC message boards.

"The biggest impact on our quarter was Y2K," CEO Michael Dell said. "While a lot of people around the world focused on the impact Y2K would have on the infrastructure of computing, and on public safety -- and that turned out not to be a problem -- that also resulted in a lot less demand in and around that period for a lot of companies ... including Dell."

Meredith said the absence of the expected post-Y2K-worries bounce in the last two months of 1999, and so far this year, has cost Dell about $500 million in revenue.

Another big snag: poorly managed "technology transitions" -- that is, moving up from one CPU to a newer, faster one -- by Dell's partners. (Read: mainly

Intel

(INTC) - Get Report

, but also Dell's R-DRAM suppliers.) Dell said it just couldn't get Intel's

Coppermine

CPUs fast enough. It lost money three ways from the delay: missed sales, downselling and unproductive marketing (i.e. ads offering PCs that Dell couldn't deliver).

Asked by an analyst on the call whether the bobbles in components would cause Dell to change its component-sourcing model, Dell said something very interesting:

Our business is one where you win or lose in these transitions. This one was quite challenging for us because of the environment we found ourselves in, and it has more to do with how much risk you take on, how fast you drive the transitions -- but if our partners don't come through, it's a problematic situation. We don't plan to fail.

That remark suggests there is major grief ahead for the suppliers -- especially the secondary suppliers, which I'd define as everyone except Intel and

Microsoft

(MSFT) - Get Report

-- that didn't deliver on time for Dell in 1999.

The most painful part: After announcing a year-over-year 50% increase in 1999, Dell says it's setting lower targets for itself for 2000: down to the low-30% range.

Michael Dell said Dell's customers now tell them they're planning their next major rollout-upgrade cycle starting around the end of February of this year -- which means a "dead month" in the present quarter, as well.

"February is not going to be tremendously strong for this industry," Dell said.

The irony here is that, even peering through the spin, many of Dell's numbers were good. Competitively, Dell says it's consistently hitting a 60% win rate on new business opportunities. And while the following is an inherently airy number, Meredith says Dell sees about $3 trillion in Web-based sales over the next three years.

Outside the financial area, we should note that a very good move for Dell during this past quarter was bringing in former

IBM

(IBM) - Get Report

Jim Vanderslice to succeed the retiring Vice Chairman Mort Topfer. Topfer has been an excellent executive for Dell; his long operating experience at

Motorola

(MOT)

provided the kind of seasoned adult supervision Dell needed through the 1990s.

I still think Dell and

Sun

(SUNW) - Get Report

are going to be the winners in the box derby this year. And I think the server-market share Dell has been stealing from everyone else in the Intel x86-based server business is going to contribute in a big way to this good year.

But Dell is off to a slower start this year than we're used to, and is going to have to crank the new products. Michael Dell said the company's new-product pipeline is bulging full right now, about to pop with growing supplies of such components as Intel's 800 MHz Pentium III CPUs -- to make the kind of numbers we're used to seeing for 2000.

Dell's report on Feb. 10 promises to be

verrrry

interesting.

With the

Nasdaq

down almost 100 today, and tech bellwether Dell down 4 in

after-hours trading tonight, prospects for tech gains don't look good for Thursday morning trading.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.