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Dell to use AMD chips, profit falls 18%

Shares of Dell have plunged more than 40 per cent in the past year as the company three times has missed revenue forecasts.

india Updated: May 19, 2006 11:10 IST

Dell Inc on Thursday said it would begin using chips from Advanced Micro Devices Inc, sending shares of both companies higher.

Shares of AMD rose more than 13 percent, shares of Dell rose 4 per cent and shares of Intel Corp, AMD's far larger rival and Dell's only chip supplier before the announcement, fell more than 5 per cent.

Dell, which posted an 18 percent decline in quarterly profit, had been the last major PC maker to use processors only from Intel, the world's largest chip supplier. Dell's decision to use the Opteron microprocessor finally consummates a long-running on-again, off-again flirtation with AMD.

Dell plans to introduce multiprocessor server computers using Opteron by the end of the year, it said in a statement.

In its earnings report, Dell said net income declined to $762 million, or 33 cents per share, from $934 million, or 37 cents per share, a year earlier. Revenue increased to $14.2 billion from $13.4 billion.

Analysts, on average, had forecast earnings per share of 33 cents and revenue of $14.2 billion, according to Reuters Estimates. Analysts cut their estimates after Dell last week said earnings were lower than the company's February forecast as it cut prices to rekindle growth.

"It is not clear to us why more aggressive pricing will drive improved profits going forward, as it clearly failed to do so in the back half of last quarter," said Cindy Shaw, an analyst at Moors & Cabot.

Round Rock, Texas-based Dell, whose founder Michael Dell changed the computer business by selling PCs directly to customers and bypassing retailers, has stumbled in the past year as competitors including No 2 PC maker Hewlett-Packard Co. offered lower prices thanks to cheaper components and more efficient manufacturing operations.

The company also said that it was ending its practice of giving specific revenue and earnings per share forecasts, noting only that it does "expect financial results for the second fiscal quarter of fiscal 2007 to be similar to its first quarter results."

For the current quarter, analysts expect Dell to earn 34 cents before items, on average, on revenue of $14.4 billion.

"The elimination of go-forward quarterly targets is an indication that Dell's uncertainty about its business remains high," Goldman Sachs analyst Laura Conigliaro wrote in a brief note to clients after Dell reported its results.

Shares of Dell have plunged more than 40 per cent in the past year as the company three times has missed revenue forecasts. Its stock trades at 16.8 times expected 2006 earnings per share, about the same as Hewlett-Packard, whose stock is up 44 per cent from a year ago.

Shares of Dell rose to $24.91 in extended trade on Thursday after closing at $23.95, up 32 cents, or 1.4 per cent, on Nasdaq. Shares of AMD jumped $4.15, or 13.2 per cent, to $35.50 in extended trade after closing at $31.35, up 58 cents or 1.9 per cent, on the New York Stock Exchange.

Intel declined 95 cents, or 5.1 per cent, to $17.70 in extended trade after closing at $18.65, off 1 cent, on Nasdaq.

First Published: May 19, 2006 11:10 IST