Dell blows past targets, but doubt persists
Dell Inc's quarterly earnings and margins blew past Wall Street expectations as component costs slid and corporations replaced aging technology, propelling its shares 6% higher.
February 16, 2011 / 09:00 IST
Dell Inc's quarterly earnings and margins blew past Wall Street expectations as component costs slid and corporations replaced aging technology, propelling its shares 6% higher.
Its forecast for a 5% to 9% rise in current fiscal-year revenue also modestly surpassed Street targets.Dell executives expressed full confidence that the company could sustain the boost in profitability, but some analysts questioned that premise. Dell posted a gross margin of 21.5% -- about 15% above the average forecast -- aided in part by falling prices of items like memory chips and LCD screens.Shares of Round Rock, Texas-based Dell leapt nearly 6% to USD 14.70 after hours, following a brief trading suspension, from a regular Nasdaq close of USD 13.91. It had spiked briefly as much as 8% after the news.Shares of larger rival Hewlett-Packard Co, which would also benefit from lower input costs and better corporate spending, gained more than 1% to USD 48.54 after hours.Dell's servers and networking revenue climbed 16%, while commercial personal computer revenue rose 10%, as businesses spent to upgrade outdated hardware."There's still a majority of our customers who have not begun the corporate refresh, or who have started and still have a long way to go," Chief Financial Officer Brian Gladden said in an interview.Although Gladden said he expects component costs to remain favorable through the first half of the new year, he downplayed input cost declines as the central factor in Dell's improved profitability. He stressed supply chain improvements and disciplined pricing. Dell's quarterly operating income was its highest in five years.But many analysts still need convincing that Dell's turnaround effort is bearing fruit."I still don't think in the long term they can sustain gross margins based on lower input costs because that will get competed away," said Michael Holt, an analyst at Morningstar.Dell still pulls in most of its revenue from selling PCs. It has benefited from a surge in spending as businesses of all sizes spend again on equipment after two years of recession.Dell is waging an uphill battle to diversify its revenue base: it wants to become a larger player in the data center equipment market, a provider of IT services, and gain a toehold in the fast-growing mobile space with tablets and smartphones.But it faces stiff competition in those markets from the likes of International Business Machines Corp, HP and Apple Inc.Investors have remained on the sidelines as Dell's turnaround plan proceeds in fits and starts. Analysts say they are still looking for the company to prove it can sustain higher levels of profitability. How sustainable?Dell's non-GAAP gross margin came in well ahead of analysts' average estimate of 18.6%. Revenue rose 5% to USD 15.7 billion, matching Wall Street's target.Operating margin rose across all four Dell units, including its consumer business, which had been a drag on profits."Revenues were a little bit less than expected but they performed well on the margin side. Our question is -- how sustainable is this going forward?" asked Brian Marshall, an analyst at Gleacher & Co.For fiscal 2012, Dell expects revenue growth of 5% to 9%, translating into revenue of USD 64 billion to USD 67 billion, mostly higher than the average forecast for USD 64.4 billion according to Thomson Reuters I/B/E/S.The No. 2 PC maker on Tuesday reported a net profit of USD 927 million, or 48 cents a share, in the fiscal fourth quarter ended January 28, up from USD 334 million, or 17 cents a share, a year ago. Excluding items, Dell earned 53 cents a share, beating the average estimate of 37 cents a share, according to Thomson Reuters I/B/E/S.It sees non-GAAP operating income growth of 6% to 12% for fiscal 2012.Although Dell has made plenty of noise in smartphone and tablet markets, its products have not been well-received, and it will have to work hard to set itself apart from rivals.Gladden said the mobile business is currently immaterial to Dell, and said he does not expect to see it contribute to the company for a "couple" of years. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
