Dell Beats Analyst Estimates

The world's top PC vendor credits its solid performance on its success in using low pricing to win customers.

Dell Computer Corp. on Thursday reported profits slightly above Wall Streets expectations on surprisingly strong sales, nearly matching its performance a year ago despite a tough economic climate.

Company founder, Chairman and CEO Michael Dell also dismissed concerns that the computer maker now faces a tougher challenge from Hewlett-Packard Co., which with the buyout of Compaq Computer Corp. this month overtook Dell as the worlds largest PC maker.

"It feels great to be number two," Dell said in response to a question during a conference call with analysts.

The executive, speaking from his headquarters in Round Rock, Texas, belittled the value of the top ranking, contending that profits, not market share, should be a companys ultimate goal.

"Weve always been number one in profitability, and were still number one in profitability by a wide margin," Dell said. "In fact, we may be the only competitor in the small computer systems industry thats profitable."

While HP posted a profit Tuesday for the just completed quarter, the computer makers $19 billion acquisition of Compaq is expected to result in earnings losses over the next two years.

For the quarter, Dell posted net income of $457 million, or 17 cents a share, on revenue of $8.08 billion, only slightly less than the $462 million, or 17 cents a share, it reported last year on sales of $8.03 billion

Wall Street analysts had been projecting earnings of 16 cents a share on revenue of $7.86 billion, according to consensus estimates compiled by Thomson Financial/First Call.

Kevin Rollins, Dells president and chief operating offer, credited much of the companys solid performance to its success in cutting operating costs, which enables the computer maker to under cut rivals prices and lure away their customers.

"Our objectives are simple and unchanged: to further reduce costs; to deliver great value to customers, particularly enterprise customers; and to profitably gain market share," Rollins said during the conference call.

Looking ahead, Dell predicted unit shipments would decline about 5 percent from the current quarter, consistent with its historical seasonal patterns, but forecasted the revenue would rise slightly, to $8.2billion.

Dell, like other major computer makers, initiated several cost-cutting initiatives last year, including layoffs, amid an industry-wide downturn in demand. Highlighting the companys success, Rollins said that overall operating expenses amounted to only 9.9 percent of revenue, a record low for the company and down from 10.7 percent a year ago.

The cost-reduction efforts will continue, Rollins said, with the company setting a goal to trim operating expenses an additional $1 billion in 2003.

Sales from desktop PCs, Dells largest source of revenue, were down 5 percent from the previous quarter, but up 5 percent compared to a year ago. Overall, unit sales of desktops were down 6 percent from the previous quarter, but up 16 percent from the same period a year ago.

Revenue from notebook PC sales rose 6 percent sequentially, but were down 9 percent year over year. The number of notebooks shipped were up 4 percent sequentially, and 5 percent higher year over year.

Unit sales of Dells servers and storage systems continued to show strong growth, while revenues rose only slightly, underscoring the computer makers focus on selling large volumes of low-margin servers.

Sales of thin rack-mounted servers, in particular, surged 65 percent compared to a year ago, and now account for 55 percent of all server units shipped.

Storage sales also increase, with Dell shipping about 20 petabytes of capacity during the quarter, a 69 percent increase over a year ago. Exiting the three-month period, Dell said it was shipping an average of 200 terabytes capacity each day.

Revenue from sales of those systems—Dell doesnt break out servers and storage numbers—were up 9 percent compared to the previous quarter, and 2 percent higher year over year. Unit shipments of servers and storage rose 5 percent from the previous quarter, and 16 percent higher year over year.