Dell issues surprise profits alert

Dell issued a surprise profits warning on Monday, adding to concerns that the world’s biggest computer maker has begun to lose its edge as it confronts a decline in average selling prices and fierce competition from overseas competitors.

The warning shocked investors, sending shares in the company down almost 6 per cent in after-hours trading. It is likely to add to concerns that rivals may be catching up to Dell, long considered a must-own among technology stocks because of its consistent out-performance.

Dell said the coming shortfall was driven by “pricing decisions in the second half of the quarter”, marking the third time in four quarters that pricing issues have led the company to disappoint Wall Street. Dell said it expected those decisions to “accelerate revenue growth in the future”.

Dell now expects earnings of 33 cents a share on revenues of $14.2bn, down from initial guidance of earnings of 36-38 cents a share on revenues of $14.2bn-$14.6bn.

Kevin Rollins, chief executive, acknowledged in an interview with the FT in March that the company needed to be “bolder” as it seeks to boost sales while maintaining its profit margins, which historically have been among the highest in the PC industry.

He said on Monday in a statement that the company continued to pursue a strategy of balancing growth and profits by “making investments in our support infrastructure and product quality and by accelerating price adjustments”.

Dell’s pricing woes began in the second quarter last year, when it slashed the prices of its low-end systems in a bid to grab market share. It then made another mistake by moving too aggressively towards higher-end products the following quarter to compensate, according to Mr Rollins.

Sales and earnings in the fourth quarter were broadly in line with forecasts, but concerns lingered after Dell said its revenue growth in the coming was to fall below 10 per cent for the first time since the dotcom bust.

The company earlier this year postponed a meeting with Wall Street analysts to allow itself more time to get to grips with the challenges it faces as it tries to increase annual revenues by a third, from $60bn to $80bn.

Dell’s shares had gained 2.9 per cent yesterday to close at $26.43 after Dell said it would increase procurement in Taiwan to $12.5bn this year, from $10bn, to counter falling profit margins.

The shares had fallen from a recent high of $41.99 in July. If yesterday’s after-market losses continue, they could fall below a 12-month low of $25.10 reached last week.

Shares fell 5.5 percent to $24.98 in after hours trade following the announcement.

The Round Rock, Texas-based company blamed the earnings miss on “pricing decisions in the second half of the quarter that the company expects will accelerate revenue growth in the future.” Dell reports first-quarter results on May 18.

Dell has been struggling with slowing growth as competition has increased from rivals Hewlett-Packard Co. and Asian competitors such as Lenovo Group Ltd. and Acer Computer International.

“It’s not that big a surprise that they’re having problems,” said Shaw Wu, an analyst at American Technology Research. “They’ve been going on for some time. PC demand appears to be weaker than expected.

“It’s obviously a disappointment, although not a complete surprise,” he added.