Update: Dell misses Q2 revenue guidance on lower prices

Revenue was still up 15 percent over last year

Dell Inc. continued to run a very profitable business, at least for the PC industry, in its most recent operating period. However, the company fell short of analyst estimates for second-quarter revenue, citing a decrease in average selling prices, Dell announced Thursday.

Second-quarter revenue was US$13.4 billion, up 15 percent from revenue of $11.7 billion last year but lower than analyst estimates of $13.7 billion in revenue, as polled by Thomson First Call.

Dell had lower average selling prices during the quarter than it had hoped for, said Kevin Rollins, Dell's chief executive officer, in a press release Thursday. The company focused on profitability to hit its earnings per share guidance, he said.

Dell basically sold more low-margin PCs in the U.S. than it had expected or wanted, Rollins said on a conference call following Dell's release. This was the result of poor execution on Dell's part, he said, since PC shipments were actually stronger than expected during the quarter.

"We got a bit more aggressive than we needed to," Rollins said. The company should have been more aware of its pricing strategies at the low end of the PC market and held the line on price decreases, he said.

"We'll pay a lot more attention to upselling, selling to the more profitable price points [in the third quarter]," he said.

Sales to the U.S. government also were lower than the company had forecasted going into the quarter, Rollins said. As a result, Dell issued modest guidance for the third quarter, saying it expects revenue to fall between $14.1 billion and $14.5 billion and earnings per share between $0.39 and $0.41.

Net income, according to generally accepted accounting principles, was $1.02 billion, up 28 percent from net income of $799 million in last year's second quarter. This works out to earnings per share of $0.41, but that figure includes a tax benefit of $0.03 per share related to a previously disclosed tax benefit from the repatriation of earnings allowed by the American Jobs Creation Act of 2004.

Without the tax benefit, earnings per share were $0.38, in line with the estimates of analysts surveyed by Thomson First Call.

Despite the lower-than-expected revenue, Dell's shipment totals grew faster than the rest of the industry, Rollins said. The company believes it grew its market share by 3 percent in server shipments. It also grew its revenue outside the U.S., its traditional stronghold, by 24 percent during the quarter.

Dell's revenue from Europe, the Middle East and Africa grew 21 percent compared to last year, while revenue from Asia-Pacific and Japan increased 24 percent.

Revenue from software and peripherals such as printers grew 35 percent in the second quarter. Dell has heavily emphasized its desire to grow in markets other than the PC segment this year, and has targeted products such as printers, digital televisions and music players as a source of future growth. Overall printer shipments increased 77 percent.

Services revenue was $1.2 billion, up 41 percent from the same period last year. Dell's competitors Hewlett-Packard Co. and IBM Corp. have much larger and more established services businesses, but Dell is looking to increase its profile within the IT services market, executives said at its analyst meeting earlier this year.

Of course, PCs still make up the majority of Dell's revenue. Shipments of mobility products, such as notebooks and personal digital assistants, were up 47 percent. PC customers are increasingly choosing notebooks over desktops when shopping for a new model, a trend that was behind the strong growth in mobile products, according to Dell.

Still, desktop shipments increased 17 percent, the company said. This was faster than rest of the industry and allowed Dell to pick up about 0.5 percent of market share in the quarter, Dell said in a press release.

Copyright © 2005 IDG Communications, Inc.

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