PC market grows but squeezes margins

PC market grows but squeezes margins

A growing squeeze on PC profit margins should lend greater urgency to efforts by Dell and Gateway to diversify into higher-margin areas this year.

Both companies are more exposed to tightening profit margins than other major PC vendors such as Hewlett-Packard and IBM, whose portfolios of products and services are much broader and could make up for shortfalls in the PC market, analysts say.

PC sales last year grew by 22 per cent -- one of the biggest annual jumps ever -- with worldwide shipments topping 113 million units, according to researcher Dataquest. But that growth will slow by 4 per cent this year, with businesses more interested in buying smaller, less expensive products, the report predicts.

Dell and Gateway closed the books on calendar 1999 with strong revenue and unit growth but declining profit margins during the fourth quarter.

Dell, which will announce its results on February 10, has warned analysts of lower-than-expected profits for its fourth fiscal quarter that ended on January 28. Dell expects to make a profit of $US430 million, or 16 cents per share. Wall Street had projected a profit of 21 cents per share.

Similarly, Gateway's fourth-quarter earnings of $US126 million were down 5 per cent from the same period last year.

Dell's stock price, at $38.12 per share on February 3, was down 29.3 per cent from a year ago. Gateway's stock price, meanwhile, rose 52.23 per cent to $59.75 -- although that is down from a high of $84 in mid-November.

Dell and Gateway blamed Y2K-related system lockdowns and component shortages for the fourth-quarter slowdown. But a continuing corporate trend toward buying cheaper client devices could put the squeeze on PC profit margins, analysts say.

Both companies are taking a number of steps to diversify their business by offering higher-margin integration and support services and by bundling Internet services with their boxes, said Laurie McCabe, an analyst at Summit Strategies.

IBM and Compaq also announced sharply lower margins and revenue from their PC businesses, though a larger percentage of their revenue comes from higher-margin products and services.

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