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Dell profits jump 29 percent
Results meet forecasts and No. 1 PC maker reaffirms third-quarter outlook; stock rallies.
August 12, 2004: 6:29 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Dell Inc. reported solid second-quarter sales and profits Thursday thanks to strong demand for personal computers and servers, news that followed an earnings warning by rival Hewlett-Packard earlier in the day.

Dell, the biggest maker of PCs, also said it will meet Wall Street's sales and earnings targets for the company's fiscal third quarter, which ends in October.

While Dell's stock rallied in after-hours trading, the news is unlikely to lift the broader market Friday since industry analysts attributed the company's sales increases more to market share gains at the expense of rivals such as HP than to surging demand.

The Round Rock, Texas-based company posted net income of $799 million, or 31 cents a share, a 29 percent increase from $621 million, or 24 cents a share, a year earlier. The results were in line with consensus estimates.

Dell had raised its profit target last month. Before that, analysts had been expecting earnings of 29 cents a share, according to First Call.

Sales jumped 20 percent to $11.7 billion from $9.8 billion a year earlier, also matching Wall Street forecasts.

For the third quarter, Dell CEO Kevin Rollins said in a statement the company expects sales of $12.5 billion, up 18 percent from last year, and earnings of 33 cents a share, a 27 percent increase from a year ago -- numbers that matched analysts' forecasts.

Shares of Dell (DELL: Research, Estimates) rose nearly 2 percent after-hours, earlier slipping about 1.3 percent in regular trading on Nasdaq.

The stock, trading 10 percent below its 52-week high, has held up much better than many of its peers during the tech sector's sell-off in recent weeks.

Bucking the trend

Sales were strong across all of Dell's product lines and geographies. The company said revenues in Europe, the Middle East and Africa increased 30 percent from a year ago while sales in Asia Pacific and Japan increased 29 percent.

A tale of two PC makers: Dell has held up much better than HP during the summer's tech stock slump.  
A tale of two PC makers: Dell has held up much better than HP during the summer's tech stock slump.

The U.S. was a bit of a laggard though, with total revenues up 16 percent from the same period last year. And the company's U.S. consumer business, which accounted for about 14 percent of Dell's total sales in the quarter, rose 12 percent from last year's second quarter.

Dell said that sales of so-called enterprise products for large corporate customers, led by strong sales of servers and storage, jumped to 22 percent of total revenues in the quarter. The company said that server shipments rose 31 percent and storage shipments grew 13 percent.

That's a stark contrast to HP, which reported an operating loss in its server business and a 5 percent decrease in sales.

"Growth was solid across the board for Dell. They didn't see weakness in enterprise, so it looks like Dell's gain was HP's loss," said Michelle Lin Gutierrez, an analyst with Schwab Soundview.

To that end, shares of HP fell slightly after hours, following a fall of more than 13 percent in regular trading Thursday on the New York Stock Exchange.

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Another encouraging sign for Dell was that gross margins, a measure of profitability, came in at 18.2 percent, up from just under 18 percent in the first quarter.

In a conference call with reporters, Rollins said the main reason for the margin improvement was that Dell isn't willing to sacrifice profitability for market share.

"We do not intend to chase low-end non profitable business," Rollins said during another conference call with analysts.

He added that margins could improve further in the next quarter, since he expects component prices to be lower.

Dell also reported a slight sequential dip in inventories from the fiscal first quarter, which should reassure investors that the company is not building up a possible glut of computers and servers in the face of what appears to be an economic soft patch. Inventories rose 30 percent in the first quarter.

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But Rollins added the company is not seeing any major signs of cautiousness from customers, a much different tone about the health of the economy than comments made by HP Chief Executive Officer Carly Fiorina Thursday morning and Cisco CEO John Chambers during that company's earnings conference call Tuesday.

Still, this good news may be unique to Dell and is not necessarily a sign that concerns about an economic slowdown are overblown.

"Dell is taking market share in a more challenging environment," said Brent Bracelin, an analyst with Pacific Crest Securities. "There a lot of question marks on how strong the recovery is but Dell continues to execute."

Gutierrez added that Dell would have needed to raise its third quarter targets or give a strong signal that the economy was still going along at a healthy clip in order to have an impact on the broader tech sector. Instead, Dell simply repeated its usual mantra: that it's winning market share regardless of market conditions.

"This won't make the market rally. It's not new news what Dell is seeing," Gutierrez said.

Analysts quoted in this story do not own shares of Dell or other companies mentioned and their firms have no investment banking relationships with the companies.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.