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Dell Profit Tops Estimates as Component Prices Dip

Dell Profit Tops Estimates as Component Prices Dip
Chief Executive Officer Michael 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. Photographer: Ryan Anson/Bloomberg

Dell Inc., the world’s third-largest supplier of personal computers, reported quarterly profit that exceeded analysts’ predictions as declining component prices resulted in fatter margins. The shares rose in late trading.

Profit excluding certain items was 45 cents a share in the fiscal third quarter, topping the 32-cent average of estimates in a Bloomberg survey. Sales rose 19 percent to $15.4 billion, Round Rock, Texas-based Dell said today in a statement. That missed the average projection of $15.7 billion.

Dell benefited from cheaper prices for parts and buoyant company spending. That helped overcome a slowdown in demand from consumers concerned about unemployment and the pace of economic recovery. Chief Executive Officer Michael 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.

“The biggest surprise isn’t the revenue weakness but the upside in earnings,” said Brian Marshall, an analyst at Gleacher & Co. in San Francisco. He has a “neutral” rating on the stock.

Dell rose as much as 9.7 percent in late trading to $15. It had climbed 32 cents to $13.67 at 4 p.m. New York time 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 ‘Refresh’

Those parts prices may “bottom out” in the fourth quarter, Gladden said on a conference call. He also expects a “more challenging competitive environment” in the current period.

Companies are upgrading aging information-technology systems and adopting the most recent iteration of Microsoft Corp.’s, operating system, Windows 7, which is helping Dell sell more PCs and server computers, Michael Dell said on the 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 in the third quarter, compared with 18.3 percent a year earlier.

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.

Time to Invest

The company can use cash from enterprise sales to fund new products and develop additional distribution channels for its less popular consumer machines, said Richard Shim, an analyst at Framingham, Massachusetts-based research firm IDC.

“If they’re going to invest in the consumer business, this is the time to do it,” Shim said.

Net income in the third 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 increased 5.2 percent to $163 million.

While corporate demand is robust, consumers are holding off on computer purchases, Gladden said in the interview.

“We saw some demand weakness” among households, he said.

Full fiscal-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 average of analysts’ estimates.

Disappointment in Mobile

Ron Garriques, who runs the division that focuses on mobile devices, will leave the company in January, Dell said yesterday. Sales of Dell’s smartphones and Streak tablet computers have been “disappointing,” said Shaw Wu, an analyst at Kaufman Bros. in San Francisco.

“They’ve been arguably out of position” in laptop sales because they don’t sell as much through retail outlets or in fast-growing emerging markets, said Wu, who rates Dell shares “hold” and doesn’t own any.

Global PC shipments rose 11 percent in the third quarter, down from 22 percent in the second quarter. Dell trails Hewlett-Packard Co. and Acer Inc. in global PC shipments.

Download: Earnings

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