Dell blows past targets, investor doubt persists

SAN FRANCISCO Wed Feb 16, 2011 4:07am IST

A man wipes the logo of the Dell IT firm  in Hannover February 28, 2010.  REUTERS/Thomas Peter/fILES

A man wipes the logo of the Dell IT firm in Hannover February 28, 2010.

Credit: Reuters/Thomas Peter/fILES

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SAN FRANCISCO (Reuters) - 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 5 to 9 percent rise in current fiscal-year revenue also surpassed Street targets by a tad.

But some analysts questioned whether its gross margin of 21.5 percent -- about 15 percent above the average forecast -- was sustainable given a big boost from the falling prices of memory chips for computers and other production costs.

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

Shares of larger rival Hewlett-Packard Co, which would also benefit from chip prices and corporate spending, gained more than 1 percent to $48.54 after hours.

Dell's quarterly operating income was its highest in 5 years.

Chief Financial Officer Brian Gladden said he was confident about the company's ability to sustain a sharp gain in its margins. Others disagreed.

"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.

"But they're definitely benefiting a bit from their focus to build out services and enterprise technology."

Dell, which is trying to shed a reputation for specializing in low-margin computers, still pulls in most of its revenue from selling personal computers. 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.

But it faces stiff competition from the likes of International Business Machines Corp, HP and Apple Inc, which are transforming themselves into one-stop shops for technology services or are having more success winning over consumers.

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 show it has a sustainable plan to boost profitability.

(For a graphic comparing Dell's share price performance and other key metrics with rivals, click r.reuters.com/kyr97r)

HOW SUSTAINABLE?

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

Operating margin rose across all four Dell units, including its consumer business, which had been a drag on profitability.

For fiscal 2012, Dell expects revenue growth of 5 to 9 percent, translating into revenue of $64 billion to $67 billion, mostly higher than the average forecast for $64.4 billion according to Thomson Reuters I/B/E/S.

The No. 2 PC maker on Tuesday reported a net profit of $927 million, or 48 cents a share, in the fiscal fourth quarter ended Jan. 28, up from $334 million, or 17 cents a share, a year ago. Excluding items, Dell earned 53 cents a share, beating the average estimate of 37 cents a share, according to Thomson Reuters I/B/E/S.

It sees non-GAAP operating income growth of 6 to 12 percent for fiscal 2012.

Although Dell has made plenty of noise in smartphone and tablet markets, its products have not been well-received, and it will have to work hard to set itself apart from rivals.

"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.

"We want to see how sustainable of a ramp this is on the margins front. That's key."

(Additional reporting by Noel Randewich in San Francisco; Writing by Edwin Chan; Editing by Richard Chang)

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