Dell Chalks Up a Win

The computer maker beats analysts' estimates, but revenue looks light for the current quarter.
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Updated from Feb. 16

Dell

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grew its top line 13% in the fourth quarter, slightly surpassing analyst expectations and the company's own guidance.

But the company's outlook for the seasonally slower first quarter came in at the low end of Wall Street expectations.

For the three months ended Feb. 3, Dell said it earned $1.25 billion, or 43 cents a share. Sales were $15.2 billion, up 13% year over year.

The company had projected revenue for the fourth quarter between $14.6 billion and $15 billion, with EPS between 40 and 42 cents. Analysts polled by Thomson First Call expected the company to earn 41 cents a share on revenue of $14.8 billion.

The company attributed some of the strength to the stronger-than-expected impact of an extra week in its fourth quarter, as well as solid demand in international markets.

Sales outside the U.S. represented 43% of total revenue, a record for Dell, and up from 40% in the third quarter. Sales in Asia Pacific and Japan generated the strongest growth during the quarter, up 21% year over year.

The results marked the first time Dell has come in ahead of Wall Street expectations, after two consecutive quarters of disappointing performance.

But investors appeared less-than-enthused with Dell's growth outlook. In early Friday trading, Dell shares shed $1.62, or 5.1%, to $30.34.

For the current quarter, Dell projected sales between $14.2 billion and $14.6 billion with EPS between 39 and 41 cents. Analysts were looking for the company to generate $14.7 billion in sales in the current quarter with EPS of 41 cents.

The company's guidance represents a 6% to 9% year-over-year growth rate, significantly lower than the double-digit revenue growth the company has achieved for the past several years in its first quarter. In a conference call with reporters following the release of the results, CEO Kevin Rollins said the lower growth rate was due to typical seasonal slowdown in the first quarter, as well as the fact that this year's first quarter is only 13 weeks, instead of 14 weeks.

"We're not seeing anything fundamentally that's slowing the market down," said Rollins.

Rollins said Dell continues to test microprocessors from both

Intel

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and

Advanced Micro Devices

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, but that the company was not changing its model of selling PCs equipped only with Intel chips. "Right now, our products are doing pretty well," Rollins said, pointing to the 47% increase in notebook unit shipments during the fourth quarter.

Dell increased its printer revenue 17% year over year in the fourth quarter, although unit shipments declined. That's because Dell shifted from selling low-end inkjet printers to higher-priced laser printers and multifunction inkjet printers, company officials said. The move should also help Dell sell more printer supplies, as multifunction printers consume more ink than standard inkjets.

Gross margins in the quarter were 17.8%, down from the 18.5% level in the fourth quarter of 2005.

Rollins said the company stepped up its focus on customer experience during the quarter, beefing up telephone support staff and opening or announcing 10 new global contact centers. He also said the company was dedicated to growing faster than the market, as it has done in China, where Dell's $2 billion run rate represents a multiple of the industry growth. He pointed to India as another region where Dell expects strong growth and where the company plans to open a manufacturing facility.

Chairman Michael Dell said the transition to the

Microsoft

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Vista operating system, expected towards the end of the year, will create a lot of demand for PCs. As consumers get accustomed to using Vista-enabled PCs at home, Dell said, they will clamor for similar capabilities at work, triggering an upgrade cycle for desktop PCs in corporations.

For the full year 2006, Dell generated $56 billion in sales with EPS of $1.46.