Tue, 17 Aug 1999, 10:02pm,,,Dell 2nd-Qtr Profit Rises to 19c-Share on 42% Increase in Sales
By Loren Steffy
Dell 2nd-Qtr Profit Rises 47% on 42% Sales Increase (Update3)
(Adds analyst comment, background on H-P results.)
Round Rock, Texas, Aug. 17 (Bloomberg) -- Dell Computer
Corp.'s fiscal second-quarter profit rose 47 percent and revenue
surged 42 percent, fueled by a doubling of its consumer business
and a boost in demand for more profitable corporate computers.
Net income for the biggest direct seller of personal
computers climbed to $507 million, or 19 cents a share, from
$346 million, or 12 cents, a year earlier.
Sales rose to $6.14 billion in the quarter ended July 30
from $4.33 billion. It was the third quarter in which growth
trailed the 50 percent pace of the previous two years. Still, the
increase exceeds the pace at rivals such as No. 2 direct seller
Gateway Inc., where sales rose 18 percent, and Hewlett-Packard
Co., which yesterday reported an 11 percent rise.
''In every segment, Dell's outgrowing the competition by
several factors,'' said Richard Schutte, an analyst with Goldman,
Sachs & Co., who has Dell on his list of recommended stocks.
Dell, based in Round Rock, Texas, near Austin, beat the most
optimistic unpublished earnings forecasts of 18 cents, and
exceeded the 17-cent average estimate from analysts surveyed by
First Call Corp.
Dell shares, which fell 5/16 to close at 41 1/8 before the
report, rose 5.5 percent to 43 3/8 after the earnings were
announced. The stock, the best performer on the Standard & Poor's
500 Index for the last three years, has increased about 12
percent this year.
Chairman Michael Dell added to the enthusiasm by predicting
that overall PC demand for the second half will be ''very
healthy'' even as companies grapple with Year 2000 issues.
''We're looking for a very solid second half,'' Dell told
analysts on a conference call.
Taking Customers
Dell increased sales in part by luring customers from rival
Compaq Computer Corp., the No. 1 PC company that's struggled with
higher costs, acquisitions and the ouster of its chief executive.
Dell ''has competition that is weak and potentially
vulnerable, and we think it can continue to grow at a good
rate,'' said Tim Ghriskey, a portfolio manager for Dreyfus Corp.,
which owns about 3.81 million Dell shares.
Dell sells PCs directly to customers via telephone orders
and the Internet. Compaq, by comparison, uses a chain of
distributors and retailers along with online sales.
Dell's Internet sales topped $30 million a day during the
quarter, up from $18 million in the first quarter, and accounted
for about 40 percent of its $11 billion annual revenue.
While other PC makers have faced declining prices for PCs,
Dell has partially compensated for the declines by boosting sales
of more profitable machines such as servers and workstations.
Sales of servers, workstations and data-storage systems rose
85 percent in the quarter.
Servers
Dell's results come a day after No. 2 computer maker Hewlett-
Packard reported earnings that fell short of some investors'
expectations. H-P didn't post the gains some analysts were
looking for in sales of servers, the machines that control the
flow of information over the Internet and other networks.
By boosting sales in that area, Dell is positioning itself
across all segments of the computer market.
''It's the diversity that a company like IBM or H-P has that
Dell is working to obtain, and will eventually obtain,'' said
Cody Acree, an analyst with Frost Securities in Dallas. At the
same time, consumer sales more than doubled.
Gains in servers helped make up for lower prices for Dell's
desktop and notebook PCs. Ghriskey estimates Dell's average
selling price fell to about $2,200 in the quarter from $2,307
last quarter.
Dell Chief Financial Officer Tom Meredith downplayed the
significance of pricing pressure. ''We are the pressure,'' he
said.
The company's gross margin, or the percentage of sales left
after subtracting production costs, widened to 22 percent from
21.5 percent in the first quarter because of cheaper components
and the increase in server sales, Meredith said.
'Impressive'
Still, that doesn't mean Dell's growth will exceed 50
percent again.
''People have to realize that the 50 to 55 percent growth
rates are behind us,'' said Ashok Kumar, an analyst with U.S.
Bancorp Piper Jaffray, who rates Dell a ''buy.''
The current 42 percent rate ''is impressive,'' Kumar said,
and ''it's a much stronger story going forward.''
Some areas did show signs of weakness. European sales rose 24
percent, less than the 30 percent some analysts predicted.
''That's below their objective,'' Schutte said.
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