Dell Walks the Turnaround Walk

The company beats Wall Street estimates.
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Updated from May 29

Dell

(DELL) - Get Report

gave Wall Street its most convincing sign yet that the comeback spearheaded by founder Michael Dell is beginning to pay off.

The Round Rock, Texas, PC maker topped analysts' revenue estimates by roughly $400 million in the fiscal first quarter, on strength in notebook PCs and overseas sales -- two of the company's traditional weak spots.

And the company showed progress cutting costs, saying it was ahead of schedule in its plan to reduce its headcount.

Shares of Dell popped 9.6%, or $2.10, to $23.91 in the premarket Friday.

"We grew faster than the industry in every worldwide product category," Michael Dell said in a post-earnings conference call. The company's 22% increase in overall unit shipments was Dell's best performance in two years.

While the progress is encouraging, Dell said that the company still has much work to do to regain its previous competitiveness.

Dell's sales in the three months ended May 2 totaled $16.07 billion, above the average analyst expectation of $15.7 billion. At this time last year, Dell had sales of $14.6 billion.

Dell earned $784 million in net income, or 38 cents a share -- four cents higher than the average analyst expectation. At this time last year, Dell earned $756 million, or 34 cents a share.

The PC maker reduced its operating expenses nearly 7% sequentially, pushing the company's operating margin to 5.6%, vs. 5.4% in the fourth quarter. Dell said it reduced its headcount by 3,700 workers in the first quarter. While the company has added employees through acquisitions, it said net headcount was down 5%.

Dell reaffirmed its commitment to achieve $3 billion in annualized savings by fiscal 2011.

Since Michael Dell returned to the CEO post in January 2007, the company has transformed many of the company's longtime business practices, most notably striking deals with

WalMart

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,

BestBuy

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and other retailers to sell its wares. Previously, Dell sold PCs solely through phone and Internet orders.

The move to retail accounted for the majority of Dell's 20% increase in revenue during the quarter, said CFO Don Carty, although he acknowledged that Dell's retail business was not nearly as profitable as its direct sales business.

"We're a long way from being ecstatic about our results," said Carty, who will step down from his role as interim CFO next month.

Dell's notebook unit shipments were up 43% year-over-year, with revenue up 22%. And sales outside the U.S. accounted for the majority of Dell's revenue for the first time ever.

The company also said it gained share by unit and revenue in the market for servers, with revenue up 4% year over year. Earlier this month

Hewlett-Packard

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said that sales of comparable servers were flat during the quarter.

Sun Microsystems

(JAVA)

reported a disastrous quarter last month, as revenue in its computer systems group declined 1.8% year-over-year due to weakening demand in the U.S.

Dell executives said the company was also seeing conservative spending by U.S. corporations, and that it expected the trend to last through the summer.

But CFO Carty said that conditions were not getting worse. "We haven't seen anything falling off a cliff here. It's sort of the same hesitancy we saw in the last quarter," he said.

In keeping with its recent custom, Dell did not provide financial guidance for the current quarter.

The company said it will continue to incur costs as it realigns it business, and noted that the costs of key PC components were not expected to decline as rapidly as they have in the past.