Dell earnings drop but beat the Street

NEW YORK (CNNMoney.com) -- Dell shares fell more than 5% in after-hours trading, after the computer maker reported a 5% drop in fourth-quarter earnings Thursday.

The Texas-based company beat Wall Street's expectations, however, on solid sales across all its segments as businesses started spending on IT again.

Net income dropped to $334 million, or 17 cents per share, compared with $351 million, or 18 cents per share a year ago.

Results included a one-time charge of 11 cents per share for special items, mainly related to the company's $3.9 billion acquisition of Perot Systems in November. Without the charge, Dell (DELL, Fortune 500) said it earned 28 cents per share. Analysts polled by Thomson Financial, who typically exclude one-time items from their estimates, were looking for 27 cents.

Sales rose 11% to $14.9 billion from $13.4 billion last year, beating analysts' forecast of $13.85 billion.

In a conference call with analysts following the results, chief financial officer Brian Gladden and Dell chairman and CEO Michael Dell said they expect to see an uptick in commercial sales in the next year and continuing into fiscal 2011 as businesses upgrade to Windows 7.

Gladden said the company is focused on cutting overhead and manufacturing costs and in simplifying its supply chain. Last year, Dell announced plans to trim expenses by $4 billion annually by the end of fiscal 2011. Gladden noted that in the last two years, Dell had consolidated its manufacturing facilities to six from 11.

"Ongoing competitor pressure and economic realities never stop, and we can't either," he said in the call. "We're moving into the next phase of our transformation."

While Dell's financials beat analyst expectations, the news comes with a mixed bag of concerns such as high consumer sales with lower margins, and tight commodity prices, said Shannon Cross, an analyst with Cross Research. On the upside, the company is investing in key growth areas, she said.

"The biggest concern is a lack of leverage in the model," she said. "People had hoped to see more of that revenue upside fall through to the bottom line."

Segment by segment

Analysts say trends point to a hardware-driven uptick in IT spending during the recent holiday months. Notebook and desktop computer sales together account for more than half of Dell's revenue.

Dell reported a 16% year-over-year jump in laptop sales and a 3% drop in revenue from desktops.

Overall, consumer sales were up 11%. That's better than expected, Gladden said in the conference call. That said, operating margins in the consumer segment were below a target 1% to 2%, due to holiday discounts, he noted.

Software sales from Dell's third largest division were flat. Meanwhile server sales rose 26%, while sales in Dell's tech services division were up 51%, year-over-year.

The company's acquisition of Perot Systems in November marked a strategic shift toward ramping up its technology services market share and taking on Hewlett-Packard (HPQ, Fortune 500) and IBM (IBM, Fortune 500).

Revenue from Dell's public business unit jumped 16% to $3.8 billion, with sales from services more than doubling, due in large part from the Perot addition.

Dell's number one rival HP reported results Wednesday that blew past Wall Street's expectations. The company said earnings jumped 25% on 8% rise in sales.

"HP had a lot more room to cut costs that Dell did, and HP has seen far more of the revenue upside fall through to their bottom line. HP is more focused on the consumer, so they've benefited from consumer strength more than Dell has," Cross pointed out.

For the full year, Dell reported a 42% drop in earnings and a 13% drop in sales over the year before.