Updated from 5:42 p.m. ET

Just as it said it would do last week,

Dell

(DELL) - Get Report

Thursday released fiscal first-quarter earnings that matched analysts' expectations. But the company lowered expectations for second-quarter earnings and sales.

The first quarter first: In the period ended May 4, the Austin, Texas-based PC maker reported earnings of $462 million, or 17 cents a share. That's exactly the figure that analysts polled by

Thomson Financial/First Call

were looking for, but it's down from the 19 cents a share Dell earned last year. Sales, meanwhile, totaled $8 billion, in line with estimates and 10% higher than their level a year ago. There were no surprises in those numbers. Dell had told investors last week that it expected to post

these very results, which are in line with the lowered outlook the company gave when it reported its fiscal fourth-quarter results in mid-February.

Dell's outlook was a bit less predictable. The company said it expects sales to fall 3% to 5% this quarter from the first quarter, translating to a range of $7.6 billion to $7.76 billion, or as much as $450 million below current expectations. In accordance with the reduced revenue forecast, Dell said its earnings would likely come in between 15 cents and 17 cents a share. Analysts were expecting 18 cents a share

Despite stumbling on a sharp growth slowdown, Dell has become something of a Wall Street darling this year, gaining 45% as investors have

taken the view that its aggressive pursuit of market share will hurt every other company much worse than it will hurt Dell. So far, that theory has been borne out by the difficulties experienced by Dell's competitors:

IBM

(IBM) - Get Report

and

Compaq

(CPQ)

each lost money in their PC units in their most recent quarters, while

Hewlett-Packard

(HWP)

merely managed to break even.

The Door

Dell, profitable in all its business lines, is certainly getting product out the door. The company claimed to have gained 6.6 points of market share in the quarter, and said it now holds 24% of the U.S. market. Consumer PC shipments grew 43%, while unit shipments of servers increased 55%. Inventory, meanwhile, declined to less than five days.

"We have one-tenth of the inventory of our closest competitor, and our operating expense as a percent of revenue is about one-half theirs, but our market share and operating margin increased sequentially,'' James Vanderslice, president and chief operating officer, said in a statement accompanying the release. "That's the power of the direct model."

It's hard to argue with that. Though there's no getting around the fact that the process is taking its toll on Dell, things don't look as dire as one might expect. Gross profit margins were 18%, down a considerable 2.5 percentage points from their level in the same period last year. But the decline seems to have stopped, with gross margins holding essentially steady with those of the prior quarter. And things looked even better on the in terms of operating profit margins, which were 7.3% in the first quarter, down from 8.5% in the same period last year, but up from the prior quarter's 5.6%.

Fatter operating margins can largely be explained by the cost reductions Dell has set in motion -- namely, the firing of more than 1,700 workers in the first quarter. The company has since set plans to fire between 3,000 and 4,000 more employees in the second and third quarters, which it expects will help keep operating margins around their present level. But how to explain the stabilization of gross margins in the middle of a full-blown price war? On the conference call following Dell's earnings release, Chief Operating Officer Kevin Rollins said that "despite skirmishes here and there," pricing didn't get notably worse in the first quarter.

Getting Crushed

By CEO Michael Dell's account, pricing doesn't have to get worse for Dell to keep crushing the competition. "The industry doesn't have a pricing problem," Dell said. "It has an operating expense problem. Unless our competitors find a way to cut more than 40% of their operating expenses, they'll have a serious problem."

Dell's more sober guidance for second-quarter sales and earnings means that investors will see analysts do a good deal of estimate trimming Friday morning. It's looking less and less likely that the company will be able to show much of any revenue growth at all for fiscal 2002, a year in which earnings are already expected to decline by 8%. Though the fundamental story behind Dell -- gaining market share while staying profitable -- looks as sound as ever, investors may have to ask themselves how much they're willing to pay for a company with such meager prospects on the near-term horizon. Dell currently trades at 34 times 2002 earnings estimates.

Strong story or not, Dell moved lower in after-hours trading. It last changed hands on

Island

at $24.81, down from $25.88 where it finished regular trading.