Dell Inc. said Tuesday it is seeing "further softening" in global demand, raising questions about the health of the technology industry and fresh concerns about the computer maker's turnaround efforts. Dell shares tumbled 11%.The company's finance chief, Brian Gladden, told investors that August, typically a slow month for Dell, was particularly bad this year, and "what's changed is we haven't seen it snap back in September."
But there are signs other large tech companies, including Dell's biggest rival, have so far been better able to weather the economic downturn. On Tuesday, Hewlett-Packard Co. Chief Financial Officer Cathie Lesjak told investors the company is "very confident" it can hit its current quarter profit target. Shares of H-P climbed nearly 7%.
Dell is in the midst of an effort by founder Michael Dell to revamp the Round Rock, Texas, company's business model. The changes, including selling PCs and refurbished Dell notebooks through retail stores, have yet to pay dividends.
"The company's inconsistent performance and lack of confidence means there's a lot of uncertainty in the turnaround," said Bill Kreher, a securities analyst with Edward Jones.
Also Tuesday, John Chambers, the chief executive of Cisco Systems Inc., held to the networking company's long-term revenue growth target, despite the economic slowdown. "We've never been more comfortable with our 12% to 17% growth long-term projection than we are right now," Mr. Chambers said at an analysts' conference.
Despite such positive comments, some analysts worried that the technology sector -- which has so far weathered the economic slowdown -- is now increasingly vulnerable to a deceleration in spending, especially with the collapse of some big clients on Wall Street such as Lehman Brothers Holdings Inc.
Shebly Seyrafi, an analyst at Calyon Securities, estimated both Dell and H-P get about 15% of their revenue from financial companies. But, he added, H-P has more insulation from the financial-services turmoil than Dell, since H-P offers technology-consulting services. Dell, meanwhile, is largely dependent on hardware like PCs and server computers for revenue, and it has often found it necessary to reduce prices -- and therefore profit margins -- to boost sales.
While financial services firms make up just 18% of overall U.S. tech spending, "there will be an impact" on tech companies from the financial sector crisis, said Andrew Bartels, a Forrester Research analyst. Financial firms are projected to cut their tech spending by several percentage points this year, he said, unlike other industries that are still growing their tech spending. On Tuesday, Forrester dropped its forecast for 2009 growth in U.S. tech spending to 6.1% from 9.4%, citing the financial industry turmoil and the slowing economy.
Dell isn't the only firm feeling the pinch. Ingram Micro Inc., which distributes computer products made by companies like H-P and Cisco, said Tuesday it is seeing weakening demand. The Santa Ana, Calif., company cut its third-quarter outlook, saying "economic softness is continuing into September, which is exerting greater pressure on operating margins."
By: Justing Scheck, Ben Worthen, and Pui-Wing Tam
Wall Street Journal; September 17, 2008
