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Dell's power to drive profits slows to crawl

Corporates' server spending spree may not be enough to increase earnings

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Dell's recent profit growth warning was fleshed out yesterday when the doyen of direct PC sales announced a tiny rise in net income and a large -- but not up to par -- growth in revenue for its fourth quarter, ended 28 January. The quarter's profits total a mere $436 million (16 cents a share), up just three per cent on the $425 million (15 cents a share) Dell recorded for the same period last year, and just under six-and-a-half per cent of the $6.8 billion the company made in sales. That figure represents an increase of 31 per cent in Dell's revenue when compared to last year's Q4, down on the 50 per cent and up revenue growth the company has been seeing for the last five years or so. Dell blamed the downturn on the same Y2k-inspired dip in sales that hit a number of PC vendors over the last months of 1999. It also singled out Intel, blaming the chip vendor's inability to supply sufficient Pentium III CPUs for a further slowdown in sales. Chairman Michael Dell was quick to point out the prospect of better times ahead, but the results suggest that he needs to do some fundamental repair work to the company he founded. A 31 per cent increase in revenue isn't exactly a sign of failure: at that level of growth, sales may be slowing but they're hardly collapsing or, worse, tailing off. But when you're profits are only up three per cent, that's more worrying, since it implies either margins are way down or Dell really needs to take a look at cutting costs. Margins are down some, thanks to said product shortages, increases in memory costs and falling PC prices, but surely not enough to see Dell keeping so small a proportion of the money it receives from a sale? And the situation isn't likely to improve in the near future, with flat earnings growth next quarter. Still Dell's a bright lad, and is clearly looking increasingly toward the high-margin server market and further diversification into the Web services business to pump up his company's profitability. The company will soon launch a Web hosting service for SMEs, ultimately expanding it to take in corporates too. And Dell expects a big server spending spree through the coming year, as company expand their Internet-oriented hardware: "I think we are at the beginning of a massive buildout of storage and servers... to provide companies with new Internet capabilities. "Probably five per cent of what is necessary five years out is installed today and what's installed today will have to be replaced." Sales of servers and enterprise storage products were up 55 per cent during the quarter, so the spree is clearly beginning already. However, the company warned that increased spending due to the hardware demands of Windows 2000 is very unlikely to make much on an impact before the second half of the year. ®

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