Dell Dodges Spending Bullet, Shares Surge

ROUND ROCK, Texas ( TheStreet) -- Investor fears that Dell ( DELL) would suffer the same fate as Cisco ( CSCO) were quashed after market close on Thursday when the computer maker reported solid third-quarter results.

Dell's gross margin was the highlight of the quarter, coming in at 19.2%, well above Wall Street's estimate of 17.5%, and helping to deliver a significant earnings beat. Investors were clearly breathing a big sigh of relief on Friday; the company's stock was up 54 cents, or 3.92%, to $14.20 in pre-market trading.
Dell

"We expect the stock to trade up on the gross margin recovery," explained Jayson Noland, an analyst at Robert W. Baird, in a note released on Friday. "We continue to see opportunity in Dell for value-oriented investors at current levels driven by a corporate client refresh."

Dell attributed its gross margin to supply chain improvements, pricing discipline and reduced component costs. The No. 2 PC maker also provided a stark contrast to Cisco's first-quarter results last week, which sent shockwaves through the entire tech sector.

Cisco's IT spending struggles failed to materialize for Dell, despite its massive public sector business. The Texan firm's public revenue came in at $4.4 billion, an increase of 20% on the same period last year. Speaking during a conference call, Dell CFO Brian Gladden noted a tougher government spending environment in Europe, similar to Cisco, but said that this was offset by stable demand in the U.S.

Gladden also pointed to "a hardware refresh amongst our largest corporate accounts," adding that the company's high-margin server and storage businesses grew 20% and 7%, respectively. Dell's services business, another high-margin area, grew 55% to $1.9 billion, driven largely by the firm's Perot Systems acquisition.

Overall, Dell's large enterprise business generated revenue of $4.3 billion, a 27% hike on the prior year's quarter. CEO Michael Dell said he sees plenty of opportunities ahead. "There is still a large installed base on non-Windows 7 PCs that will be replaced by Windows 7 PCs," he said during the conference call. He also cited virtualization and Microsoft ( MSFT) Exchange as growth drivers.

The firm did give rather tepid fourth-quarter guidance, citing muted consumer growth. Dell predicted revenue inline or slightly up on the third quarter's $15.4 billion; analysts surveyed by Thomson Reuters had forecast sales of $16.28 billion. Investors largely shrugged this off, however.

The bigger issue for Dell is maintaining its current profit levels. "While we applaud Dell's management team for its margin performance, we cannot get constructive on the shares quite yet due to our belief that current margin levels are unsustainable," said Brian Marshall, an analyst at Gleacher & Company, in a note released on Friday.

Dell's results nonetheless bode well for computer giant HP ( HPQ), which reports its own fourth-quarter results after market close on Monday.

HP shares rose in the aftermath of Dell's results on Thursday, and crept up 6 cents, or 0.14%, to $41.75 on Friday.

--Written by James Rogers in New York.

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