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Dell Shares Plunge on Lowered 2Q Outlook

Shares of Dell Inc. plunged to their lowest level in nearly five years Friday after the world's largest computer maker lowered its second-quarter earnings outlook below Wall Street's estimates, due mainly to aggressive price cuts in a slowing market.

The company said it expects fiscal second-quarter earnings between 21 cents and 23 cents per share on sales of about $14 billion, below the earnings of 32 cents per share on sales of $14.2 billion analysts polled by Thomson Financial had expected. The company's previous outlook was roughly in line with consensus estimates.

Analysts had been expecting the company to lower its sales outlook, but the resulting profit shortfall surprised investors, who sent the company's shares down $2.47, or 11 percent, to $19.63 in morning trading on the Nasdaq. The last time the stock traded near that price was in 2001.

Dell's operating margins were already low, so even a seemingly minor revenue shortfall can compress them quite a bit, leading to much lower earnings than a company with strong margins would see, said ThinkEquity analyst Eric M. Ross.

"Internally, the company is in disarray. They are finding it difficult to compete because they are so used to winning," Ross added. "It's taking them more effort to be the low cost, low price provider."

Round Rock, Texas-based Dell pioneered the direct sales model it is known for. But the company is facing tough competition from rivals such as Hewlett-Packard Co. and China's Lenovo Group Ltd.

Dell's worldwide PC shipments grew about 11 percent in the second quarter, according to research firms IDC and Gartner Inc. But others saw faster growth, and as a result Dell's global market share barely budged.

Even Apple, which holds a tiny fraction of the computer market, is flexing its muscles. The company's fiscal third-quarter profit was boosted not only by iPod sales, but demand for its notebook computers as well.

Apple was able to take advantage of falling component prices in a way Dell hasn't, said Shaw Wu of American Technology Research. The analyst, who has a "Buy" rating on both Apple and Dell, said he thought Dell could withstand some of the pressure thanks to the lower component prices.

"Obviously they didn't," he said.

Microsoft's delayed launch of the Vista operating system has weighed on Dell, Wu said, adding that it will help drive hardware sales once it is released.

Dell's news weighed on rival Hewlett Packard Co.'s stock as well as the tech sector in general. Shares of the Palo Alto, Calif.-based HP slid $1.38, or 4.3 percent, to $30.42 in morning trading on the New York Stock Exchange.

Apple's shares edged up 14 cents to $60.64 on the Nasdaq.

Dell plans to post its second-quarter results for the quarter on Aug. 17.

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