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Dell Shares Are Rewarded

Low expectations help the PC giant rise despite modest EPS upside and merely in-line guidance.

Updated from Feb. 12


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got a boost earlyFriday after the companydelivered a penny upside in its January quarter. The results were announced after the bell Thursday. The rally came despite guidance from Dell that was merely in line with the Wall Street's consensus estimate.

The stock was recently up $1.03, or 3%, to $34.59.

The fairly steep stock gain may have to do withthe

low expectations that prevailed heading into Thursday's earningsconference call.

Though Dell certainly wasn't wildly bullish, "theysaid things are going up as opposed to


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, which said theyreally don't have visibility," said Scott Rothport,president of LakeView Asset Management and a


contributor. "It could be there were a lotof people shorting Dell thinking they would have adisastrous call like Cisco."

Rothport has a small short position in Dell, which he said was not for fundamental reasons but as part of a long-short quantitative basket.

Meanwhile, analysts found little new news to chewon as far as Dell's business goes. "No big surprises(not surprisingly)," summed up the title of a FirstAlbany note. The bank raised its fiscal year 2005 EPSestimate by 2 pennies, to $1.26, noting that factorssuch as lower research and development spending and alower tax rate could aid earnings down the road.

"Dell's consistency from one quarter to the nexthas eliminated virtually all suspense from itsquarterly releases," pointed out Charlie Wolf ofNeedham & Co., who said the most noteworthy aspects ofthe quarter were 40% growth in both server andnotebook shipments, plus Dell's success in meeting itsguidance for 25% shipment growth. He's maintaining hisfiscal year 2005 earnings estimate for $1.25.

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Neither firm has an investment bankingrelationship with Dell.

Steady, Not Explosive

Thursday evening, President Kevin Rollins offered relatively subdued comments on the outlook for enterprise spending. "We think it will be steady but not explosive throughout the year," he said, noting that Dell is simply seeing a continuation of the steady improvement in corporate demand that it's seen for four or five quarters.

Though Rollins said demand is rising across the board, Dell hasn't yet seen it kick in among the biggest spenders. Rather, growth is most noticeable among small and medium businesses. "Starting at the low end growth is higher, then you see slower growth when you move to the most global companies," Rollins observed.

Dell's fiscal fourth-quarter net income totaled $749 million, or 29 cents a share. Earnings rose 26% from last year's levels.

Sales were in line with expectations at $11.5 billion, up 18% year on year. Dell said it saw unit shipments rise 25% year, in line with its guidance, though plenty of analysts had predicted a shortfall.

Dell saw strong server growth, with shipments up 40%, while storage revenue grew 47%.

But the company didn't offer its usual boast about besting rivals on the PC front. For good reason: Gartner data showed that Dell lost some unit share to


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in the calendar fourth quarter. Management commentary suggested, though, that Dell had seen a much stronger performance in January and had passed up some sales at the low end rather than price more aggressively.

"Much of the industry's quarterly growth was at the low ends of the desktop and notebook categories, which offer little if any profitability. Dell met its operating targets by pursuing profitable growth," said Rollins in a statement.

For guidance, the company forecast April quarter sales of $11.2 billion and EPS of 28 cents, exactly on target with Thomson First Call estimates. Management said unit shipments and revenues will decline 3% on a quarterly basis, consistent with usual seasonal patterns.

Compared with last year's levels, product shipments in the first fiscal quarter should rise more than 20%.

On the call, Rollins noted that industry PC unit shipments have continued to accelerate since turning positive in the third quarter of 2002. "That said, there is still a ways to go as much of the growth has been at the low end of retail where margins are low," he said, adding that average selling prices for the industry fell 9% through the first three quarters of 2003, worse than the 4.5% drop for the same period in 2002.

Arch-rival H-P is one reason for the slide, Rollins suggested. H-P has complicated Dell's drive to gain share by periodically rolling out extra aggressive promotions -- to the point, at times, of pushing its own PC business into the red.

Though he didn't name names, Rollins clearly referred to H-P when he carped about an industry player with a "subsidization-based model" that uses a printer business to offset its loss-making PC business. For its most recent reported quarter, H-P's computer division was profitable, however.

In a separate comment of interest to chip-watchers, Dell seemed to throw cold water on the idea that it might sign onto


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64-bit Opteron server chip, which is being offered by rivals


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and will reportedly be adopted by H-P.

"I think a 64-bit extension to a 32-bit chip is a rather good idea, but I think

AMD won't be the only one to come up with that idea," said Rollins, lending credence to industry speculation that its sole chip supplier


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will soon roll out its own version of the silicon. "We're going to fully participate in that market. The issue right now is not whether you can extend a 32-bit to a 64-bit chip. The question is what you can actually do with it in the form of software," he added.

The vast majority of software applications are currently geared to the 32-bit silicon architecture version rather than the 64-bit version, which offers faster data-crunching capabilities.