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Dell's Q2 earnings beat forecasts

Perhaps investors should feel more confident about the general state of the technology sector than they have in recent weeks.

Dell Computer, the world's leading maker of personal computers, delivered a dose of positive news on Friday when it announced that its second-quarter earnings would be stronger than expected.

The company said it expected to earn US$0.31 a share for the quarter that ends July 30, US$0.02 above both its previous forecast and the consensus of analysts, according to Thomson First Call. The outlook was based on second-quarter revenues of US$11.7 billion, which is in line with the company's previous guidance.

The announcement comes one day after IBM reported quarterly profits that surpassed Wall Street estimates. Also on Thursday, the research firm IDC released a report showing that personal computer shipments were more robust in April, May and June than expected.

"The industry is seeing a PC recovery occurring, especially in the commercial segment," said Alan Promisel, an IDC analyst. The commercial sector, as defined by the research firm, includes businesses, governments and schools.

"There's significant demand especially coming from the small-, medium- and large-business segments," Promisel said.

The personal computer market grew by 14 to 15 percent in the second quarter when compared to that same time period last year, according to IDC. For the same period, Dell saw its personal computer shipments grow 23 percent.

"We're definitely in a major upgrade cycle in both the business and the home market, and that's likely to continue for the next several quarters because there's good underlying economic rationale for the upgrades in both market," said Charles Wolf, a Wall Street analyst at Needham & Co.

The news on the technology front had been mostly bad in recent weeks. A spate of surprisingly disappointing second-quarter earnings, coupled with news of rising inventories, prompted observers to question whether technology spending had suddenly stalled.

Software companies that sell expensive packages to the corporate market have provided the bulk of bad news in this earnings season. PeopleSoft, Veritas and Siebel Systems are among the large publicly traded companies that warned that their earnings would fall short of expectations or tamped down expectations of future growth.

On Tuesday, Intel, the world's largest maker of computer chips, revealed that its inventory had reached a three-year high as corporate buying lagged.

But there was good news Wednesday from Apple Computer, which announced that its profits for the quarter had tripled. Most of that was due to surging demand for its iPod portable music player, but the company said sales of its Macintosh computer were up 19 percent.

"Despite warnings from some sectors of the information technology industry, the recovery seems to be holding steady for now," Roger Kay, an IDC analyst, said in a prepared statement that accompanied Thursday's release of his firm's quarterly personal computer report.

His colleague, Promisel, added, that "some of the more negative news was isolated to specific company problems."

Intel, for instance, reported that profits nearly doubled in the second quarter. Intel's mistake, according to Andy Bryant, the company's chief financial officer, was that it should have reduced its production levels sooner than it did to avoid an inventory surplus.

"A lot of this comes down to expectations that are too high," said Kevin Hunt, a Wall Street analyst at Thomas Weisel Partners. "You look at some of these companies and they have 15 percent growth, which isn't bad, but they were expecting 25 or whatever, which is why they get hit so hard.

"The general trend of business is still OK and trending up," Hunt said.

Still, Wolf warned against reading too much into the Dell announcement. Of the US$0.02 above previous forecasts, Wolf said: "one penny of that upside is due to a lower tax rate, deriving a higher percentage of its revenues from the international market.

"A second penny was the result of better margins" based largely on a drop in the price of component parts, Wolf said. "If there had been stronger revenues, that would have been a much more positive signal."

Shares of Dell rose US$0.55 to close at US$35.42 on Friday. Dell's announcement came just before the start of the company's annual shareholders meeting in Austin, Texas. At the meeting, Kevin Rollins took over as chief executive, replacing the company's founder, Michael Dell.

"Today's change is one of title, not of roles and responsibilities," Dell told shareholders according to a Reuters news report. Dell, who founded the company in 1984, remains as the company's board chairman.

The company had previously announced its intentions to promote Rollins.

Also on Friday shareholders narrowly rejected a resolution calling on the company to treat employee stock options as a normal business expense. In recent months, shareholders at Intel, the Hewlett-Packard Co. and PeopleSoft have passed similar resolutions. Stockholders of Apple did so last year.
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