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Dell disappoints
World's biggest PC maker beats earnings estimates but sales miss, stock slips.
February 10, 2005: 6:20 PM EST
By Paul R. La Monica, CNN/Money senior writer
Shares of Dell are near their 52-week high but appear poised to dip due to a lackluster 1Q sales forecast.
Shares of Dell are near their 52-week high but appear poised to dip due to a lackluster 1Q sales forecast.
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NEW YORK (CNN/Money) - Investors were hoping Dell would beat Wall Street's sales and earnings forecasts Thursday, but the company delivered on only one count.

The world's largest maker of personal computers reported better-than-expected earnings for the fourth quarter, with profits excluding a charge coming in at 37 cents a share, a penny higher than consensus estimates.

Sales jumped 17 percent to $13.45 billion but came in a shade below forecasts of $13.54 billion.

What's more, the Round Rock, Texas-based company gave a similarly mixed message about its fiscal first quarter.

The company said earnings should be 37 cents a share in the quarter, an increase of 32 percent from a year earlier and one cent higher than consensus estimates.

But Dell said sales for the quarter would be $13.4 billion, up 16 percent on a year-over-year basis, but below analysts' projections of $13.5 billion.

Shares of Dell (Research) fell about 3.2 percent in after-hours trading, according to INET, after rising 1.4 percent during the regular session on Nasdaq.

Other tech companies were hit by Dell's disappointing sales news as well, with Microsoft (Research), Intel (Research), Advanced Micro Devices (Research), and Hewlett-Packard (Research) all drifting lower after hours.

But it looks like Dell is a victim of its own success. The stock is just 2.3 percent below its 52-week high, a reflection of the high hopes that investors have for the company.

Good isn't good enough

During a conference call with analysts, Goldman Sachs analyst Laura Conigliaro was critical of Dell for missing sales estimates, adding that she thought the company must have had internal sales targets that were higher than the ones that it gave Wall Street.

That drew a defensive response from Dell chief financial officer Jim Schneider. "We give you the target that we think we can actually hit. We're not trying to lowball this. We tell you what we're going to do and do it," said Schneider.

So it's clear that while Dell is content to keep growing at a steady pace, analysts and investors wanted Dell to trounce estimates.

"This is obviously a strong quarter, but investors did have high expectations for what the company could do," said Brent Bracelin, an analyst with Pacific Crest Securities, adding that the quarter was "uninspiring" given Dell's track record.

Adam Adelman, senior portfolio manager with Philippe Investment Management, an institutional firm that owns shares of Dell, said he recently trimmed the firm's stake in the company because the stock, at about 26 times this year's earnings estimates, was starting to look fully valued.

Still, Bracelin said investors should be pleased since Dell's profit margins remain intact but said that the slightly lower-than-expected sales and lower forecast for the first quarter are signs that price competition is cutthroat as ever in the PC market.

Dell has faced some tough competition from Hewlett-Packard, the world's second largest PC maker. But HP is in a state of turmoil after its board ousted CEO Carly Fiorina on Wednesday.

During a separate conference call with reporters, Dell CEO Kevin Rollins said the company saw some opportunities since some corporate customers may be "unsettled" due to Fiorina's resignation.

He also cited customer uncertainty surrounding IBM's (Research) planned sale of its PC division to China's Lenovo Group.

The company touted strong growth rates in its storage, services and software and peripherals divisions as well.

Storage sales grew 27 percent from a year earlier and services sales were up 32 percent. Revenue from the software and peripherals segment, which includes consumer electronic devices like flat-screen televisions, handheld devices and MP3 players, increased 36 percent.

These three segments are still a relatively small part of the company's overall business, though, as Dell still relies mainly on sales of desktops, notebooks and servers for a large portion of its sales.

But Harry Blount, an analyst with Lehman Brothers, said investors shouldn't overlook the potential in these businesses, particularly the services segment, which tends to be a highly profitable business that features stable long-term contracts.

"One of the most underappreciated aspects of the Dell story is that its recurring revenue stream is growing," Blount said.

Dell did not give guidance for the full fiscal year. However, Rollins said that Dell has a new revenue goal of reaching $80 billion. He did not provide a timetable for this target, though. Previously, Dell had talked about reaching $60 billion in annual sales by the end of fiscal 2007. The company is well ahead of that projection, with analysts expecting Dell to post sales of $57.7 billion in this fiscal year.

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


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