Dell Sees Shrinking PC Market Ahead

Surprising strength in demand for consumer PCs helped Dell Computer record a 5.1% increase in fourth-quarter net income. But the company's CFO warned that an industrywide drop in PC shipments next quarter would drag down revenue by 3% to 5%.

Dell (DELL-Nasdaq), the world's largest supplier of PCs, continues to steal market share from rivals through aggressive price-cutting. For the quarter ending Feb. 1, Dell earned $456 million on revenue of $8.06 billion. That's up from a year ago, when the company earned $434 million on revenue of $8.67 billion.

The company's operating margins--how much it pockets from each sale after expenses--rose a bit to 7.4%, compared with 6.8% a year ago. Operating expenses were 10.2% of revenue, the lowest in company history.

Consumer sales lifted the company's performance, Dell CFO James Schneider says, though demand from business customers has leveled off. Home PC sales in North and South America rose more than 50% from the previous quarter. Worldwide shipments of enterprise systems were up 6% from the previous quarter and were 12% higher than during the same quarter a year ago.

For the 2002 fiscal year, Dell's net income fell to $1.25 billion, from $2.18 billion. Sales fell slightly, to $31.17 billion. But Schneider expects industrywide PC shipments to decline 10% next quarter, and Dell's unit shipments--and revenue--to drop 3% to 5%.

Dell faces challenging times and won't be able to lean on holiday PC sales to offset them, Technology Business Research analyst Brooks Gray says. "It's going to be a rough year," he says. "It was consumer demand that really was the story for the quarter, but that extra boost they got was a direct result of the consumer buying season. This is their last quarter where they're going to see that." Gray says he expects to see Dell continue to expand its market share, but in such a tough PC market, the company may find itself with a larger piece of a smaller pie.