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Dell brings tech scorecard to 4-1
Most tech giants appear healthy, yet corporate budgets aren't growing. What's an investor to think?
May 13, 2005: 9:52 AM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - Dell Inc. just gave investors what they wanted: Robust growth outside of the United States and in products and services beyond its core personal computer business.

After missing Wall Street sales forecasts three months ago, Dell (Research) rebounded Thursday with a first-quarter earnings and sales report that met analysts' estimates. Revenue at the world's largest personal computer maker jumped 16 percent, to $13.4 billion from a year earlier. Earnings per share rose 32 percent, to 37 cents a share.

Dell CEO Kevin Rollins attributed the growth to a big upswing in sales during April that offset sluggish demand -- particularly among large U.S. corporations -- in the prior two months. Rollins also indicated that the Round Rock, Texas-based company is benefiting from changes afoot at several competitors, especially IBM and Hewlett-Packard.

"We remain confident and optimistic about our business," said Rollins in a conference call late Thursday. Rollins gave sales and profit guidance that essentially match Thomson First Call estimates.

Investors liked what they saw; Dell shares shot up nearly 3 percent in after-hours trading.

"It looks good," said Brent Bracelin, an analyst with Pacific Crest Securities.

Dell's main source of revenues are sales of desktop and notebook computers. But as those businesses have matured, the company has been aggressively pushing into other lines of business, including wireless devices, servers, storage, printing and imaging, and software.

All six of the company's key products and services grew year-over-year, with the slowest growth coming from desktop personal computers. Although still a relatively small piece of the company's business, storage sales grew the fastest, 49 percent, to $400 million.

Growth was especially strong, the company said, in Europe and Japan.

"Obviously, the big concern in the quarter was 'Can Dell accelerate share gains in a market where you have declining industry growth and yet still maintain profit margins?' That was a big unknown."

As far as Pacific Crest's Bracelin is concerned, Dell has cleared up some of the uncertainty. He pointed to Dell's operating margins, which, at 8.8 percent, have held steady despite price discounting on personal computers and other products.

"By and large it was a very good quarter," said Bracelin.

Technology outlook is mixed

But investor enthusiasm, which extended to other big technology stocks in after-hours trading, could prove fleeting.

The near-term outlook for the entire industry remains murky. Technology stocks have had a rough year so far as investors worry about the global economy and the impact any slowdown would have on overall demand for technology, especially among deep-pocketed companies.

Goldman Sachs didn't help investor jitters any this week. The Wall Street bank issued its latest analysis of technology spending, based on a survey of 100 information technology managers at Fortune 1000 companies. After projecting in December that technology budgets would grow 3.9 percent in 2005, Goldman Sachs now anticipates just 3 percent growth.

Goldman Sachs said the survey "suggests that IT managers continue to be very constrained in their spending for now."

Yet, four technology giants -- Microsoft (Research), Intel (Research), Cisco Systems, and now Dell -- have all posted solid quarterly earnings in recent weeks. The sole exception has been IBM (Research), which announced last month results that badly missed Wall Street estimates. Hewlett-Packard (Research), the last of the tech bellwethers, is due to report quarterly earnings next week.

Some analysts say that broad statements about technology spending at this point in the year are premature and can mask what's really going on in the industry.

Leslie Santiago, an analyst with Piper Jaffray, noted that technology outlays follow a similar cycle every year, with the first half of the year by far the most difficult and the second-half characterized by big increases in sales.

"We have this problem every year where we start questioning demand early on," said Santiago. Only this time, he added, "it was more pronounced primarily because of the IBM (earnings) mess."

Looking for solace in past trends

Both Santiago and Bracelin said that, even if technology budgets are not growing significantly, the more important story is the impact industry-wide competition is having on market shares.

"With a maturing technology landscape you're going to increasingly see certain vendors do well as they gain market share and other vendors will struggle as they lose market share," said Bracelin.

Analysts say Dell appears to be grabbing bigger slices of the overall technology pie. They said the same about Cisco (Research), which announced Tuesday financial results that beat Wall Street estimates.

"Dell had a great quarter," said Santiago. "The company primarily saw a lot of growth internationally, in direct contrast to what IBM saw. My sense is that Dell is taking market share in Europe from their competitors."

And possibly from Hewlett-Packard too.

To that end, Dell boasted Thursday about growth in its nascent printer business -- a sector Hewlett-Packard dominates. "We're very happy with that business," said Rollins, noting that Dell ink jet cartridge sales have captured 18 percent of the market in less than a year and a half. Sales of color laser printers are also strong, he said.

What's more, the Goldman Sachs survey suggested that Dell is gaining share in the market for servers, personal computers and storage -- in some instances possibly at the expense of IBM and Hewlett-Packard.

Goldman Sachs, while painting a dour picture of technology spending generally, did offer one incentive for technology investors to buy now. It said that technology shares, which have rallied at year-end in six of the last seven years, are poised to jump again starting as early as mid-July.

"Anxiety around another rocky second quarter will likely keep a damper on (technology) stocks near term," the report stated. "Nevertheless, the widely anticipated end-of-the-year rally looms large on the horizon, and tech investors will be loath to miss a single day of the run-up after suffering through the first part of the year."

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Analysts quoted in this story do not own Dell shares and their research firms do not have a banking relationship with the company.  Top of page


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