Dell Moves Toward AMD Chips Amid Earnings Drop

The world's largest PC maker says it was merely bowing to customer demand when it decided to start offering microprocessors from Advanced Micro Devices Inc. in some of its high-end servers.

But the announcement, disclosed as Dell reported an 18 percent drop in its first-quarter profit Thursday, represents a significant change from the company's long-standing use of chips only from Intel Corp., AMD's much larger rival.

After months of rumors and some analysts suggesting that the company's Intel-only policy was hurting business, Dell said it will use AMD's Opteron Dual-Core processors in Dell's multiprocessor servers by year's end for the first time.

"We're going to bring the best technology to the market," Dell founder Michael Dell said of his company's decision. "If you look at the history of our company, we have for the majority of the last 22 years asserted a position of delivering great value and great service to our customers."

The decision also boosted shares of AMD and Dell, while Intel fell.

Dell shares rose 16 cents to $24.11 in midday trading Friday on the Nasdaq Stock Market while AMD stock jumped $2.77, or nearly 9 percent, to $34.12 on the New York Stock Exchange. Intel shed 48 cents, or 2.6 percent, to $18.17 on the Nasdaq.

The deal is a major win for AMD, which had little presence in the server market until it released its Opteron processor in 2003. The critically acclaimed chip put Intel in the rare position of having to play catch-up with its smaller rival.

"It's a fairly small category in terms of units," Rollins said. "We will still be launching this year a broad line of Intel products. We think we've got a winning combination of bringing great technology to all customers."

Though Dell began offering AMD chips through its acquisition of high-end gamer PC maker Alienware Corp. in March, don't look for AMD chips fanning out into Dell's broader product line anytime soon, said one analyst.

"They're offering these chips where people are asking for it: in servers and high end gaming systems," said Frank Gillett, principal analyst with Forrester Research Inc. "It's not clear that they will feel compelled to offer AMD elsewhere unless people start asking for it by name."

The chip news overshadowed Dell's results, which missed Wall Street's expectations. The company has been struggling amid tough competition from rivals such as Hewlett-Packard Co.

Round Rock-based Dell earned $762 million, or 33 cents per share in the three months ended May 5, compared to $934 million, or 37 cents per share, in the year ago period. That included a charge of $77 million, or 3 cents a share, for the expensing of stock options.

First-quarter sales rose 6 percent from the year ago period to $14.2 billion. It had previously forecast revenue of $14.2 billion to $14.6 billion.

Analysts were expecting 38 cents per share on revenue of $14.5 billion, according to a survey by Thomson Financial.

Last week, Dell lowered its earnings projections for the quarter to 36 cents to 38 cents per share because of what it called "pricing issues."

Dell grew into a Wall Street darling selling computers directly to businesses and consumers. Last month, two technology research firms reported that Dell's PC sales were growing more slowly than competitors.

IDC Research Inc. and Gartner Inc. said Dell's January-March shipments grew about 10 percent, but industrywide sales rose 13 percent and main rival HP gained 22 percent.

Stamford, Conn.-based Gartner said Dell saw its share of industry computer shipments decline to 16.5 percent in the first quarter of 2006 from 16.9 percent a year ago. Though Dell shipped 10.2 percent more PCs than it did in last year's first quarter, Gartner said the growth rate was Dell's slowest since the third quarter of 2001.

Desktop PCs account for about 40 percent of Dell's revenue.

Company executives promised a long-term, aggressive strategy to regain its footing by focusing on three areas: new products, additional savings and a plan that will pump more than $100 million to boost customer service efforts.

Some analysts said Dell will have to continue to sacrifice profits to regain market share.

"They underestimated how competitive the market is," said Nick Nilarp, analyst at Fitch Ratings. "Dell can no longer win on price, they have to win on customer service. I think they've recognized this. Clearly Dell is still growing and they will not stand still."

Dell said it would no longer issue quarterly guidance and earnings per share and would instead only focus on long-term specific company and industry factors influencing performance. However, Dell said it expected results for the second quarter to be similar to the first quarter.


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