Dell Nears Low Bar

It has a decent shot to meet modest fourth-quarter expectations.
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For two straight quarters now,

Dell

(DELL) - Get Report

has fallen short of the Street's expectations. But few investors are expecting a third strike when the Round Rock, Texas, computer maker reports fiscal fourth-quarter results after the bell Thursday.

Of course, meeting expectations shouldn't be too difficult, given how low Dell has set the bar. Its guidance of $14.6 billion to $15 billion in revenue represents 9% to 11% growth, a far cry from the 17% growth investors once expected.

To some, the slow growth owes to a sort of provincialism, with Dell so heavily reliant on the U.S. market and

Intel

(INTC) - Get Report

.

"It's harder for them to gain share internationally," says PNC Advisors VP Equity Research Bill Gorman, whose firm recently reduced its position in Dell. "The U.S. is still the biggest part

of Dell's business and that's the slowest growing market right now."

Despite Dell's moves to branch out, the Americas remains the company's major playing field, representing 66.3% of revenue in the most recent third quarter. The revolving door in Dell's Asian operations hasn't helped. In December, William Amelio, Dell's Asia Pacific Division chief,

jumped ship to

Lenovo Group

. The move came just two months after Dell's head of China operations, Foo Piau Phang, resigned.

Still, there's evidence that Dell is finding its footing abroad. Unit shipments in China were up 46% year over year in the fiscal third quarter. And industry research firm IDC reported that Dell's PC shipments in Asia Pacific jumped 19% in the fourth quarter of calendar 2005, the strongest showing among the top five PC makers.

Meanwhile, investors have questioned whether Dell's loyalty to Intel chips, which Dell uses exclusively in its products, is putting the company at a competitive disadvantage. Although Intel's microprocessors are by far the most popular in the world, many corporate buyers are partial to rival

Advanced Micro Devices'

(AMD) - Get Report

Opteron processor when it comes to the servers that run their back-end data centers.

To view Street Insight's video preview of Dell, please click here

.

Dell officials have recently dropped hints that they're open to using AMD chips, though it's unclear whether this is anything more than a bargaining tactic for Dell to improve its business terms with Intel.

Wall Street has been very focused on Dell's chip plans, says Pat Becker Jr., of Becker Capital Management, which doesn't own Dell shares at the moment. "There's probably more risk of that happening now than I can think of any time in the past 10 years," he said of Dell incorporating AMD processors in some of its products.

Investors are also interested in what balance Dell will strike between growth and profitability. The company's decision to focus on higher-end PCs stunted top-line growth earlier last year. But in November, CEO Kevin Rollins told analysts that the company had spent the third quarter readjusting its mix of low-end, midrange and high-end consumer PCs and was "ready to get back into a balanced position in the marketplace."

For some analysts, this means Dell is committed to recapturing its share of low-end PC sales, resulting in some revenue growth upside over the next few quarters.

"Dell is coming to a point where it must decide if it should sacrifice some margin in order to return its revenue growth to the 11%-to-13% range," wrote Goldman Sachs analyst Laura Conigliaro in an investor note. "At this point, we think the company will opt to give up some margin to drive higher revenue growth." (Goldman Sachs has received compensation for investment banking from Dell and had a non-investment banking relationship with the company within the past 12 months.)

The company also has an opportunity to grow its revenue, thanks to its direct sales model, said Sanford Bernstein analyst Toni Sacconaghi Jr. In addition to the inherent cost advantage of the model, Sacconaghi said that by interfacing directly with its customers, Dell can upsell PCs with higher average prices as well as bundle higher-margin services, software and peripherals with each sale.

"Dell's profitability advantages are largely a function of its direct model, and none of the company's major competitors have been able to emulate it," wrote Sacconaghi. "The net result is that Dell has a sustainable cost/profitability advantage, which in a commodity market such as PCs places it in a unique competitive position."

For the fourth quarter, the average analyst forecast calls for $14.8 billion in revenue, with EPS of 41 cents, according to Thomson First Call.