Dell Will Miss Q3 Target

The third quarter of 2005 looks like it could be one of the worst operating period for Dell Inc. in several years. The company announced Monday that it will fall short of its own revenue guidance for the quarter on lower-than-expected sales, and take a US$450 million charge to replace broken Optiplex desktops and restructure its workforce.

Dell now expects revenue for the company’s third quarter, which ended last Friday, to be about $13.9 billion. In August, Dell predicted third-quarter revenue would fall between $14.1 billion and $14.5 billion. The shortfall was due to missed sales targets in the company’s U.S. consumer business and its U.K. business, said Jess Blackburn, a company spokesman. He declined to specify exactly what portion of Dell’s business was affected.

This will be the second straight quarter that Dell has missed its goals for quarterly revenue. Last quarter, Chief Executive Officer Kevin Rollins said the company failed to convince customers to upgrade their cheaper desktops to more profitable systems.

Dell will have to take a $300 million charge in the third quarter to account for the cost of replacing motherboards on some of the company’s GX270 and GX280 Optiplex desktop PCs, Blackburn said. In some cases, the capacitors on those two models can fail, preventing the systems from being turned on, he said.

Dell is not recalling the units, Blackburn said. Instead, the company will send field service technicians out to customers whose systems have failed in order to replace the motherboards, he said. There is no safety risk or potential loss of data as a result of the problems with the capacitors, he said. Optiplex customers can contact Dell for more information.

The remainder of the $450 million charge will cover the cost of ending leases on certain Dell facilities in and around the company’s Round Rock, Texas, headquarters, excess parts for systems which the company does not believe it can sell, and some layoffs, Blackburn said.

Dell, known throughout the technology industry for its aggressive inventory management practices, is not commenting on the nature of the excess parts, Blackburn said. Similarly, it is not revealing how many workers lost their jobs. Most of the affected workers had been located in Texas or the U.K., he said.

Even excluding the effects of the $450 million charge, Dell’s third-quarter earnings per share will fall at the low end of previous expectations. Earnings per share are now expected to be $0.39, the low end of the range forecast given by the company in August. The impact of the charge is expected to reduce earnings per share by $0.14 to $0.25 as defined by generally accepted accounting principles.

Dell will report earnings on Nov. 10, when Rollins will share more information about the conditions that led to company’s poor third-quarter results, Blackburn said.

By Tom Krazit, IDG News Service