Dell profit warning shakes markets

By Steve Malone

Posted on 24 Jul 2006 at 10:43

Dell Computer, the world's largest manufacturer of PCs, sent technology shares into disarray at the end of last week when it announced a profit warning. The company's share price fell to a six year low when it revealed that earnings would be 30 per cent lower than expected.

The former stellar performer blamed 'aggressive pricing in a slowing commercial market worldwide' as new management at HP and Chinese manufacturer Lenovo, which took over IBM's old PC business, step up the competition.

The company also announced that shipments in the second quarter rose by only six per cent after what was generally agreed to be a poor Q1 performance.

Some might see the flat sales as part of a trend, with both Intel and AMD reporting that earnings are below expectations - the conventional wisdom being that the market is waiting for Vista to appear. However, arch rival HP, the number two PC maker, has reported sales up 16 per cent, so Dell may have to look closer to home for the roots of its poor showing.

'Aggressive pricing' has never been an issue before with Dell. The industry has now worked for decades on the basis of ever-lower prices for its PCs and notebooks. What has changed is that the Dell hyper efficient model of keen sourcing, assembly in its own plants and sales over the phone and Internet is now under threat.

Whereas previously the business model helped it to offer low prices while holding its margins its rivals are now closing the so called 'efficiency gap'. In an effort to hold the line Dell sought to make savings elsewhere. However, chickens are now coming home to roost.

Recently, the company has had a spate of bad publicity over its service and support strategy which, earlier this month, led to the company to launch its One2One blog to try and soak up and respond to the criticisms. Dell has also pledged to spend $100mn (£53mn) on sales and support to bolster its reputation for customer care.

Dell will announce the second quarter results on the 17 August.