Dell beats, but...
Dell posts record revenues and earnings, but forecasts slowing growth.
By Amanda Cantrell, staff writer

NEW YORK ( - Dell announced record revenues and earnings and beat Wall Street expectations, but a disappointing outlook for the current quarter tempered those results.

Dell (Research) posted $15.2 billion in revenues for its fiscal fourth quarter, a 13 percent increase over the year-ago quarter; earnings per share grew 52 percent to $0.43. The company said it got a boost from the calendar's extra week of sales during the quarter.

But Dell forecasted revenue growth in the fiscal first quarter would be between 6 percent and 9 percent -- single-digit guidance that fell short of the Street's 10-percent expectation.

Dell expects revenues for the current quarter of between $14.2 billion and $14.6 billion. The high end of that range falls shy of Wall Street's expectations of $14.7 billion. The company expects earnings of between $0.39 and $0.41, excluding an estimated $0.03 cents of stock-based compensation. The midpoint of guidance also falls short of Wall Street's expectation of $0.41.

In a conference call to discuss the results, Dell CEO Kevin Rollins downplayed the weakness, and fielded questions about the recent solid performance of rival Hewlett-Packard (Research).

"HP grew 5.6 percent year on year; we grew 13 percent," said Rollins on a conference call to reporters when pressed about the company's slowing growth in the wake of its HP's resurgence. "I do think we have some tougher comparisons than our competitors... We had superb growth a year ago and some of our competitors did not."

Analysts were also concerned about the weak guidance, especially the sequential drop-off from the fourth quarter to the first quarter. Rollins attributed some of the decline to the extra selling days in the fourth quarter, but analysts weren't satisfied by the calendar-explanation.

Mark Lanyon, an equity analyst for Morningstar, called the 6 to 9 percent forecast "a range you can drive a truck through...Either they've decided to be conservative on their outlook and surprise on the upside, or they see the overall market slowing down. HP (also) had a great quarter overall and had tepid guidance after a seasonally strong last three quarters."

Dell's gross profit margin slipped, falling to 17.8 percent from 18.5 percent in the year-ago quarter.

"People were wondering if they are pricing really aggressively and not getting the unit growth they want," said Lanyon. "It wasn't a great profitability quarter. I view it as a work in progress. The Dell business model is still working, it's just not delivering the stellar results we saw 4 or 5 quarters ago."

Strong quarter, better mix

Investors have been gnashing their teeth over Dell since August of last year, when it missed revenue forecasts and said it got too aggressive in pushing low-cost desktops. More troubling, Dell lowered sales guidance for the third quarter and subsequently did so for the fourth quarter as well. The stock faced a punishing sell off, with shares falling 13 percent since then and 28 percent throughout 2005.

But despite the negatives in the recent quarter, there was underlying strength in the results.

"We were expecting about 9 percent on the quarter top line, and it came out about 13 percent," said Steve Scruggs, portfolio manager for The Queens Road Funds, whose firm owns shares of Dell. "That was a big number. With HP reporting such good numbers yesterday, I was surprised by that. It doesn't look like (Dell) gave up any share."

Strong sales to corporate customers and high growth in international markets led the gains. Dell shipped a record 10.2 million PCs during the quarter, a 15 percent year-over-year increase, and 37 million for the year, a 19 percent increase over the previous year. Dell's enterprise business, which includes storage, servers, services, and software and peripherals, grew 21 percent.

Sales outside the U.S. grew 21 percent, led by strong growth in areas of Europe and Asia Pacific. Services revenue grew 26 percent, while its printer business grew 17 percent.

Rollins said the company also benefited from a better product mix. Rollins said the company got a boost in the quarter from its higher-end XPS line, launched in September last year, with XPS desktops growing 20 percent during a period that was flat overall for desktops.

"We had a balancing issue of products and pricing and feature sets; we think we've got that in good shape now," he said.

In addition to slowing growth, Dell faces increased competition from HP, which has become a leaner, meaner competitor under Mark Hurd, who took over as CEO on April 1. Analysts believe HP's better-than-expected revenues and earnings can be attributed to better execution, not just cost-cutting.

While Dell still enjoys better profit margins on its PC products, HP is becoming more competitive, in part because unlike Dell, it offers PCs and servers with AMD (Research) chips, which many in the industry currently believe to be technologically superior to Intel chips.

Rollins told reporters that despite recent rumors, the company is not currently planning to ship systems with AMD chips.

"There is no change in stance. We are still buying our processors from Intel," he said. "We have commented publicly that we test all technologies; We will only make changes when we deem it to be appropriate."

Dell also announced it will buy back $1.2 billion of shares this quarter.

Dell currently trades at roughly 20 times estimated 2006 earnings. Shares finished Thursday's trading session at $31.73. Dell stock dipped about a third of a percent in after-hours trading.


Lanyon does not own shares of HP, and his firm does not do investment banking. Top of page

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