Is Dell ( DELL) fighting yesterday's war?

That's one possibility that weighed on the shares of the world's No. 1 PC vendor in the wake of its announcement Monday that its first-quarter financial results would once again come up short.

Like a military superpower that can't adjust its tactics to take on a new enemy, Dell may effectively be fielding tank battalions in a confrontation where air supremacy is the key.

Faced with slowing demand and increased competition, Dell unsheathed its most trusted weapon in the first quarter: price cuts.

But while the price cuts appear to have taken the expected toll on Dell's margins, they don't seem to have delivered the payload of sales growth.

Revenue in the first quarter will come in at $14.2 billion, according to Dell, vs. its previous estimate of $14.2 billion to $14.6 billion. EPS will be 33 cents, compared with the company's earlier projection of 36 cents to 38 cents.

In its preannouncement, Dell stated that it had taken pricing actions in the first quarter in order to "accelerate revenue growth in the future."

The price cuts' lack of immediate results left many analysts and investors skeptical about the plan.

Shares of Dell were down 4.12%, or $1.09, at $25.34 in midday trading Tuesday.

"Even with aggressive month-of-April pricing, Dell could do no better than reach low-end revenue targets, raising questions about how successful pricing will be going forward as a sustained way to achieve growth," wrote Goldman Sachs analyst Laura Conigliaro in a note to investors lowering her EPS estimates for the 2006 calendar year.

In fact, noted Conigliaro, Dell itself doesn't seem convinced that the price cuts are the solution to its problems. As recently as the July 2005 quarter, she said, Dell blamed overly aggressive cuts for its poor results, adding that the measure wasn't able to drive enough incremental unit volume.

All this, Conigliaro said, suggests that the company is still searching for answers. Goldman Sachs makes a market in Dell shares and has received compensation for investment banking and non-investment banking services from Dell in the past 12 months.

In the past, Dell has been able to use the operating efficiencies inherent in its direct sales model to price its machines well below that of the competition.

But with sub-$600 desktops and notebooks now the norm across the industry, some investors question whether the playing field has changed and Dell's pricing model has reached a point of diminishing returns.

In a note to investors, Credit Suisse First Boston analyst Robert Semple wondered whether Dell had priced beyond the point of "elasticity," the point at which price cuts spur a corresponding increase in demand.

Dell's pricing tactics, wrote Semple, raise the question as to whether "an aggressive pricing strategy in an inelastic environment is feasible." CSFB makes a market in Dell shares and has provided investment banking and non-investment banking services to Dell within the past 12 months.

Dell's woes come as many industry analysts are predicting an industrywide slowdown in PC demand in 2006. And Dell, which has long delighted investors with faster growth than the overall industry, has suddenly found itself struggling to keep up.

According to industry research firm Gartner, Dell's worldwide PC unit shipment growth of 10% in the first quarter represented its worst performance since 2001. In the U.S., Dell actually lagged the region's average industry growth for the first time.

Analysts point to a variety of reasons for Dell's problems, including stiffer competition from a resurgent Hewlett-Packard ( HPQ), as well as Lenovo Group and Acer, both of which have recently stepped up efforts to take share in the U.S.

Dell's strictly Intel ( INTC) processor-based machines also are cited as a major weakness, given that most people consider Advanced Micro Devices' ( AMD) microprocessors to be technologically superior for both desktop PCs and corporate servers at the moment.

Becker Capital Management's Pat Becker Jr. believes that Dell's latest financial miss means the company can no longer put off selling machines that feature AMD chips.

"I don't think having AMD machines solves their problems," he says, "but on the corporate side, if they have a customer that wants an AMD-based server, they're going to be able to meet that demand," instead of watching the sale go to a rival such as H-P. Becker's firm has a position in H-P.

In March, Dell acquired Alienware, a maker of high-end gaming PCs that use both AMD and Intel processors. Though Dell will now apparently sell AMD-based systems through its Alienware product line, the company has given no indication that it will use AMD chips in Dell-branded systems.

Bill Gorman, the vice president of equity research at PNC Advisors, said his firm closed out its position in Dell after the company's previous negative preannouncement in October 2005. He believes the company needs to grow by continuing its sales efforts overseas, improving its customer service and strengthening its product lineup among other things.

"The bottom line is there are no quick answers to what they need to do," says Gorman. "I think price cuts are at best a partial answer to what Dell needs to do."

And with the continued consolidation of the PC market, there's less available market share for Dell to grab with price cuts.

"Usually the white-box companies are the most vulnerable, but I don't know if there's enough share there," said Gorman.

Becker, of Becker Capital Management, believes that it's too early to make the call as to whether the price cuts can reverse Dell's fortunes.

While Dell's price cuts did not affect first-quarter results, Becker believes that it may take some time for the cuts to manifest themselves in Dell's financial results.

The second quarter will be the moment of truth, he says, demonstrating whether Dell can still cut prices to get an acceleration of revenue and market share.

"If that doesn't happen," says Becker, "maybe we'll be into a new paradigm."

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