The world's third-largest PC maker reported quarterly profit that exceeded analysts' predictions as declining component prices resulted in fatter margins
(Bloomberg) — Dell Inc., the third-largest supplier of personal computers, jumped almost 10 percent in late trading yesterday after posting earnings that beat analysts' predictions, a sign of falling component prices.
Profit excluding certain items was 45 cents a share in the fiscal third quarter, Round Rock, Texas-based Dell said in a statement yesterday. That topped the 32-cent average of estimates in a Bloomberg survey.
Dell benefited from cheaper prices for parts and buoyant spending from companies that are updating aging personal computers and servers. The PC maker also held the line on price- cutting to preserve profit margins, said Aaron Rakers, an analyst at Stifel Nicolaus & Co. in St. Louis.
"They've put in place a little more discipline," Rakers said. "Hopefully that discipline can be sustained as we move forward."
Dell rose as much as 9.7 percent to $15 in late trading yesterday. It had climbed 32 cents to $13.67 on the Nasdaq Stock Market. The shares have lost 4.8 percent this year.
Profit margins were helped by "pricing discipline" that kept Dell from cutting product prices too much, Chief Financial Officer Brian Gladden said in an interview after the results. Components costs such as computer memory and hard drives have dipped, and that also shored up profitability, he said.
Companies are upgrading dated information-technology systems and adopting the most recent iteration of Microsoft Corp.'s operating system, Windows 7, as well as its Exchange e- mail software and Office 2010 productivity programs.
That's helping Dell sell more PCs and server computers, Chief Executive Officer Michael Dell said on a call with analysts.
"The refresh cycle is very much in full bloom," he said.
Excluding certain expenses, gross margin, the percentage of sales remaining after subtracting production costs, was 20 percent last quarter, compared with 18.3 percent a year earlier.
Favorable component prices and company buying helped Dell overcome a slowdown in demand from consumers concerned about unemployment and the pace of economic recovery.
"We saw some demand weakness" among households, Gladden said in the interview.
Sales rose 19 percent to $15.4 billion. That missed the average projection of $15.7 billion. Full year sales growth will be near the midpoint of a 14 percent to 19 percent range set earlier this year, Dell said. That indicates sales of about $61.6 billion, short of the $62.2 billion analysts predicted.
CEO Dell aims to lessen the company's dependence on PC sales by spending more on research and development and using acquisitions to build up the server, data storage, networking gear and services businesses.
Dell gets about 80 percent of its revenue from corporate and government sales, which fared better than its consumer business. Sales to large companies rose 27 percent, and small and mid-sized businesses gained 24 percent. That outpaced a 4 percent increase for consumers.
Parts prices may "bottom out" this quarter, Gladden said on the conference call. He also said he expects a "more challenging competitive environment" in the current period.
That, combined with price reductions by Hewlett-Packard Co. and Acer Inc., may make it difficult for Dell to keep its margins as high as they were in the third quarter, said Ashok Kumar, an analyst at Rodman & Renshaw LLC in New York who has a "market perform" rating on Dell shares and doesn't own them.
"They've always found it difficult to balance growth and profitability," he said. "If they can manage 17 percent to 18 percent gross margins going forward, the Street can live with that."
Net income last quarter more than doubled to $822 million, or 42 cents a share, from $337 million, or 17 cents, a year earlier. Operating expenses climbed 19.5 percent, and spending on research and development gained 5.2 percent to $163 million.
Global PC shipments rose 11 percent in the third quarter, down from 22 percent in the second quarter. Dell trails HP and Acer in global PC shipments.