Updated from May 8With 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.
"Dell management has been vocal that the business model functions optimally when PC and server units are growing above-market -- this has not been the case for several quarters. Given that Dell's price advantage has eroded to 5% or less since '01, a margin reset is necessary to re-widen the price gap and gain share," Citigroup wrote. Dell's business model doesn't appear to be broken, said Pacific Crest analyst Brent Bracelin, but the company is struggling to cope with problems resulting from the apparent end of a three-year PC refresh cycle. However, since PC prices are already very low, it isn't clear how effective price cuts will be in generating demand. (His company does not have an investment banking relationship with Dell.) Dell CEO Kevin Rollins said in a press release, "During the first quarter, we continued to execute our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments. We are committed to delivering industry-leading value to our customers, which ultimately results in industry-leading growth for the company." Dell will release its first-quarter results on May 18.