Dell Q3 earnings rise 31%

By Caroline Humer

NEW YORK: Dell Computer Corp. said on that its third-quarter profits rose 31 percent as the No. 1 personal computer maker gained market share, but its shares fell in after-hours trade on a disappointing outlook. Shares fell about 3 percent.

Investors said that they had been hoping the company would give guidance for the fourth-quarter that was above the Wall Street consensus in order to drive shares up beyond the 30 percent rise they have booked in the past six weeks. Round Rock, Texas-based Dell said that cost reductions, lower component costs -- - such as cheaper computer chips -- and an improved mix of products and services contributed to its higher profits.

Shipments to consumers in the United States increased more than 50 percent, Dell said, enabling the company to regain its spot as the No. 1 personal computer maker from competitor Hewlett-Packard Co. HP had usurped Dell in May after it bought Compaq Computer. Dell said it sees fourth quarter earnings of 23 cents per share, with revenue up 20 percent at $9.7 billion.

Dell Chief Financial Officer Jim Schneider said that the company's earnings could be 24 cents per share if the broader technology market improves or if the company is able to cut costs more quickly. "While we saw a few encouraging signs in the third quarter it is still too soon to call a rebound in overall IT spending," Schneider said. "The demand environment has not changed. It remains stable in the US, with some other regions still experiencing softness."

Schneider said the fourth quarter results could be affected by lower operating margin consumer sales, an increase in more aggressive pricing and the lack of a strong rebound in corporate spending.

Dell's forecast for fourth-quarter revenues of $9.7 billion was in line with Wall Street consensus forecasts, but Bear Stearns analyst Andrew Neff said there were unpublished expectations for revenue of about $9.9 billion. Dell shares fell to $30.06 in after-hours trade from $30.94 during regular trade, where they rose 89 cents, or 3 percent.

Dell said fourth-quarter shipments could rise 23 percent from the year-ago period.

"The market was anticipating additional upside surprise and what we got from Dell was on target," said John Rutledge, a portfolio manager at the Evergreen Technology Fund, which owns Dell shares. "But you can't complain about the results."

Dell said net income for the third quarter ended Nov. 1 rose to $561 million, or 21 cents per share, from $429 million, or 16 cents per share, a year-ago. Revenue rose 22 percent to $9.14 billion from $7.47 billion a year earlier.

Analysts expected the company to earn 21 cents per share on revenue of $9.1 billion in the third quarter, according to Thomson First Call. Dell on Oct. 1 raised its guidance slightly for the quarter, saying that it expected to report revenues of $9.1 billion and earnings of 21 cents per share.

Dell builds its personal computers and large server computers to order, allowing it to cut prices and take advantage of decreases in the cost of such components as microprocessors or circuit boards.

Dell's profit and revenue gains come at a time when the rest of the technology industry has been hard hit by weak spending among large corporations. Dell has used volume and low-cost manufacturing to keep prices low on its personal computers and large server computers.

"The fact is these guys have executed during this downturn better than any other company," said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. Since Oct. 1, Dell shares have gained 32 percent while the broader American Stock Exchange Computer Hardware index is up 26 percent.

Those type of gains could be over for the moment, said Bob Rezaee of Montgomery Asset Management, which owns Dell shares. "I think we'll take a little pause here," he said. "We as investors always want more especially when the stock has had a substantial run."

(With additional reporting by Duncan Martell in San Francisco)

© Reuters