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Dell delivers, but ...
No. 1 PC maker posts solid gains in sales and earnings but its stock sinks on worries about margins.
May 13, 2004: 6:22 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Dell Inc. reported Thursday that sales and profits jumped more than 20 percent in the latest quarter on strong results overseas, but investors were disappointed with a drop in profit margins.

Dell (DELL: Research, Estimates) stock sank 3 percent in after-hours trading even though the world's largest maker of personal computers met earnings forecasts on Wall Street while sales came in ahead of estimates.

The company also gave sales guidance for the second quarter that was slightly higher than Wall Street's current consensus forecast.

The Round Rock, Texas-based company reported net income of $731 million, or 28 cents a share, in its fiscal first quarter ended April 30, up 22 percent from $598 million, or 23 cents a share, a year earlier. Analysts were expecting earnings of 28 cents a share, according to First Call.

Dell posted sales of $11.5 billion, a 21 percent increase from last year's first quarter and ahead of Wall Street's consensus estimate of $11.4 billion.

The company raised its sales guidance for the quarter last month. For the second quarter, Dell said it expects sales of $11.7 billion. Analysts had been expecting $11.6 billion. Dell also said it would meet analysts' earnings estimate of 29 cents a share for the second quarter.

Lower margins didn't delight

Dell stock sank about 2 percent in regular trading before dropping after-hours. Some investors had been hoping Dell could beat earnings estimates as it did in its fiscal fourth quarter.

There also have been concerns lately about a price war in the heavily competitive PC industry since Dell reclaimed the global market share lead from rival Hewlett-Packard in the first quarter.

Investors have been wondering if this would hurt Dell's profit margins, which are the best in the PC sector.

Dell's gross margins -- a key measure of profitability -- slipped from 18.2 percent in the fiscal fourth quarter to 18 percent in the first quarter. And operating margins edged lower as well.

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Still, despite Thursday's drop, the stock has held up reasonably well during the recent tech sell-off this year, on hopes for improving corporate demand for PCs and servers.

On a conference call with reporters, Dell chief financial officer Jim Schneider said a higher-than-expected rise in the price of memory chips, and not pricing-cutting on PCs, was the main reason behind the margin decline.

Bill Fearnley Jr., an analyst with FTN Midwest Research, said Dell should be able to boost its margins as it sells more printers and servers, which are more profitable than desktop computers.

And during a separate call with analysts, Dell President Kevin Rollins said Dell will focus on gaining market share in higher-profit areas in a bid to offset any more increases in component prices.

Rollins will become CEO after Dell's annual meeting in July. Founder Michael Dell, currently CEO and chairman, announced in March he's giving up the CEO role.

U.S. spending improves but lags international growth

Investors might have also been hoping for more positive data from the company regarding corporate tech spending. Dell said overall product shipments grew 25 percent in the quarter from a year ago but that U.S. shipments rose at a slower pace, 18 percent.

"Demand from small- and medium businesses and consumers was particularly strong, and information-technology spending by large corporate customers continued to improve," the company said in a statement.

Still, Schneider categorized the pickup in U.S. corporate spending as the strongest the company had seen in several quarters.


Dell enjoyed strong gains in its international businesses. Shipments in Asia-Pacific and Japan jumped 38 percent while shipments in its Europe, Middle East and Africa division rose 37 percent. Sales from outside the Americas account for about 35 percent of total revenue.

In another possibly worrisome sign, inventories rose sharply from the fourth quarter, up 30 percent to $425 million.

Wall Street has expressed some concerns lately about increased inventory levels at tech companies such as Intel and Cisco during their latest quarters. Rising inventories have brought back painful memories of the tech bubble's burst in 2000 when many companies were forced to write down inventory that went unsold.

Schneider conceded Dell's inventories were higher than he would like but said it is not a major concern because $425 million in inventory only amounts to about four days' worth of supply for the company.

Overall, Brent Bracelin, an analyst with Pacific Crest Securities, said Dell reported an impressive quarter, adding the drop in gross margins was just a "minor setback."

"The Dell train has not derailed. It's just slowed down a bit," he said.

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

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