Dell shares sink on warning about weak demand; IT sector woes spreading?

Posted September 16, 2008
Updated September 17, 2008

— Hurting from price cuts and an expensive restructuring, Dell Inc. (Nasdaq: DELL) rattled investors Tuesday with another warning, this time that corporate spending on technology is weakening further.

By most measures, the technology sector has been chugging along fine, which is why Dell's announcement caused uncertainty about whether the problem is specific to Dell or indicates broader problems in the market.

Dell operates its largest manufacturing plant in Winston-Salem, N.C. Recent media reports have said the company is considering selling some of its production facilities in order to reduce costs.

The revelation caused Dell's shares to fall $2.01, 11 percent, to $15.98 - their lowest level since September 2001 - and dragged down other technology companies' stocks, including Sun Microsystems Inc., whose shares fell 4 percent, and IBM Corp., whose shares dipped in early trading but rebounded.

A big part of Dell's problems stem from its poor competitive position in growth markets outside the U.S., and are not necessarily representative of troubles that will hit other companies as severely, analysts said.

While Dell rivals like Hewlett-Packard Co. (NYSE: HP) and IBM Corp. (NYSE: IBM) are also feeling the downturn, they're able to absorb it better because of their broader geographic reach, higher-profit products and breadth of offerings including services and software. HP, however, plans to cut 24,000 jobs as it completes a merger with EDS.

Also on Wednesday, Nortel (NYSE: NT) cut its revenue forecast. That news triggered an 18 percent selloff in the NT stock price.

One positive note from the IT sector came from Cisco (Nasdaq: CSCO) Chairman John Chambers, however. At an event in California, Chambers said Cisco was standing by its forecasts for growth over the next four years.

Oracle, meanwhile, announces earnings today. On Tuesday, Adobe disclosed earnings that largely met Wall Street expectations.

Dell sells mostly lower-end personal computers and servers based on personal-computer chips, areas with extreme pricing pressure.

Dell's announcement is proof that "in tougher markets, the strong get stronger and the weak get weaker," said Shaw Wu, an analyst with American Technology Research.

"Things are definitely tougher, but they've been tough for the past year," he said. "The companies that aren't as well-positioned are going to have a harder time. I don't think HP or IBM are immune either, but they're much better positioned to withstand the storm."

Investors were worried that the technology sector, which has held up well and in some cases grown despite the economic turbulence, is due for a downturn after escaping a lot of the pain triggered by the crises in the credit and mortgage markets.

Some companies have actually ramped up spending on technology because they see ways to save money by outsourcing their computing chores and buying more energy-efficient servers and personal computers.

IBM and Hewlett-Packard Co., the two biggest tech companies, have kept impressing Wall Street with better-than-expected results, fueled by increased spending overseas but also a weak dollar that boosts the value of foreign transactions.

In contrast, Dell said "conservatism" in information-technology spending, which hurt its results for the quarter that ended Aug. 1, has deepened during the current period and led to "further softening in global end-user demand."

Dell's chief financial officer, Brian Gladden, told a conference of financial analysts Tuesday that sales of servers and storage equipment to large corporations have been "a little more stable" than sales of personal computers. The bigger machines are attractive even in tough times because of their potential to improve productivity, he said.

Gladden said Dell's slowdown is broadly based, and not tied specifically to Dell's products or changes in its pricing. After slashing prices aggressively to enter new markets, Dell is pulling back and raising prices in some areas to improve profitability, a change that could turn off some customers.

Dell said the slowdown is being felt widely - in the U.S., Western Europe and Asia. However, Dell, the world's No. 2 maker of PCs and its No. 3 server maker, gets about 80 percent of its revenue from businesses and government agencies, so its results are likely not indicative of consumer spending on computers.

In fact, in one potential indicator of consumer sentiment, electronics retailer Best Buy Co. reported Tuesday that its revenue rose 12 percent - and the company specifically cited strength in sales of notebook computers.

"Computers are a high, high growth engine for us right now," Brian Dunn, Best Buy's chief operating officer, said in an interview.

More broadly, market-research firm IDC recently forecast that worldwide personal-computer shipments are expected to grow 15.7 percent in 2008 and that growth will stay in the double-digits through 2011.

Another sign of the health of the tech sector came Tuesday when Forrester Research raised its projections for information technology spending in the U.S. The market research firm now expects spending to grow 5.4 percent in 2008, up from its previous forecast of 3.4 percent growth.

Even so, Forrester vice president Andrew Bartels said Dell's announcement reflects broader pressures that could accumulate. "When you have Wall Street firms that lay off 20-, 30-, 40-thousand people, then you are going to have 20-, 30-, 40-thousand excess PCs," he said.

A notable exception to the uncertainty in Tuesday's trading was Hewlett-Packard, whose shares gained $3.08, 6.8 percent, to $48.41 on the company's plans for bigger-than-expected layoffs and cost savings connected to its acquisition of Electronic Data Systems Corp. HP said after the market closed Monday that it plans to cut 24,600 jobs over the next three years, nearly 8 percent of its work force.


Associated Press Writers Ashley Heher in Chicago and Barbara Ortutay in New York contributed to this report.


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