Thu, Feb 17, 2011 - Page 10 News List

Dell blows past targets, but doubts persist

Reuters, SAN FRANCISCO

Japanese dancing group World Order, led by former kick boxer Genki Sudo, center, performs in Tokyo yesterday at a promotional event for US computer giant Dell’s smart phone Streak. The gadget uses the Android operating system and has a 5-inch touch screen display.

Photo: AFP

Dell Inc’s quarterly earnings and margins blew past Wall Street expectations as component costs slid and corporations replaced aging technology, propelling its shares 6 percent higher.

Its forecast for a rise of between 5 percent and 9 percent in current fiscal-year revenue also modestly surpassed Wall Street targets.

Dell executives expressed confidence that the company could sustain the boost in profitability, but some analysts questioned that premise. Dell posted a gross margin of 21.5 percent — about 15 percent above the average forecast — aided in part by falling prices of items like memory chips and LCD screens.

Shares of Round Rock, Texas-based Dell leapt nearly 6 percent to US$14.70 after hours, following a brief trading suspension, from a regular NASDAQ close of US$13.91. It had spiked briefly as much as 8 percent after the news.

Shares of larger rival Hewlett-Packard Co (HP), which would also benefit from lower input costs and better corporate spending, gained more than 1 percent to US$48.54 after hours.

Dell’s servers and networking revenue climbed 16 percent, while commercial personal computer revenue rose 10 percent, as businesses spent to upgrade outdated hardware.

“There’s still a majority of our customers who have not begun the corporate refresh, or who have started and still have a long way to go,” Dell’s chief financial officer Brian Gladden said in an interview.

Although Gladden said he expects component costs to remain favorable through the first half of the year, he downplayed input cost declines as the central factor in Dell’s improved profitability. He stressed supply chain improvements and disciplined pricing. Dell’s quarterly operating income was at its highest in five years.

However, many analysts still need convincing that Dell’s turnaround effort is bearing fruit.

“I still don’t think in the long term they can sustain gross margins based on lower input costs because that will get competed away,” said Michael Holt, an analyst at Morningstar.

Dell still pulls in most of its revenue from selling PCs. It has benefited from a surge in spending as businesses of all sizes spend again on equipment after two years of recession.

Dell is waging an uphill battle to diversify its revenue base: It wants to become a larger player in the data center equipment market, a provider of IT services, and gain a toehold in the fast--growing mobile space with tablets and smartphones.

However, it faces stiff competition in those markets from the likes of International Business Machines Corp, HP and Apple Inc.

The company said it expects more acquisitions in areas like storage servers and services to come.

The latest purchase by Dell was of data storage company Compellent Technologies Inc in December for about US$960 million.

Investors have remained on the sidelines as Dell’s turnaround plan proceeds in fits and starts. Analysts say they are still looking for the company to prove it can sustain higher levels of profitability.

Dell’s non-GAAP gross margin came in well ahead of analysts’ average estimate of 18.6 percent. Revenue rose 5 percent to US$15.7 billion, matching Wall Street’s target.

“Revenues were a little bit less than expected, but they performed well on the margin side. Our question is: How sustainable is this going forward?” asked Brian Marshall, an analyst at Gleacher & Co.

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