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Dell reports quarterly profit, hikes rev outlook

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CIOL Bureau
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By Caroline Humer



NEW YORK: No. 2 personal computer maker Dell Computer Corp. has reported quarterly profits compared to a loss and raised expectations for revenue in the current quarter, saying it will continue to steal market share from competitors. Dell founder and Chief Executive Michael Dell said the company, which also sells large computers for businesses, data storage machines and network switches, will expand into computer printers and handhelds computers.



He declined to set a timeline for entering either market, although a company executive said last month the company would be in printers at least by year-end. "You'll see our announcement when it comes," Dell said. Dell shares rose slightly in after-hours trade.



Round Rock, Texas-based Dell has stood out as technology companies have been pressured this year by the economic downturn and tightening in corporate spending. Its stock has also outpaced competitors, leaving investors to question whether its current level is too pricey. Despite Dell's planned forays into new consumer devices, the company said those areas would contribute only a small percentage of revenues and said it is looking to corporate customers to drive future revenue growth.



"It's storage. It's servers. It's services," said Dell Chief Operating Officer Kevin Rollins. Dell said net income for the quarter ended Aug. 2 rose to $501 million, or 19 cents per share, compared with a loss of $101 million, or 4 cents per share, a year earlier. In the year-ago period, the company reported earnings of $433 million, or 16 cents per share, excluding a $742 million charge for cutting jobs and closing factories.



"I think in North America it's clear that they are gaining a considerable amount of market share, especially with their server and storage initiative," said Bob Rezaee, a portfolio manager at Montgomery Asset Management. Dell uses its low-cost model and direct distribution method to undercut competitors who use third-party distributors.



"They don't have the costs on indirect distribution, which other people have," said Barry Jaruzelski, lead partner in Booz Allen Hamilton's global computer & electronics practice. Dell lost its hard-won spot as the No. 1 PC maker earlier this year to Hewlett-Packard Co. after HP bought another PC maker, Compaq Computer Corp. Dell is now a close second to HP.



Demand in US stabilizing


Michael Dell said demand in the U.S. is stabilizing but declined to pinpoint when the long-awaited recovery in technology sales would occur. "We are already seeing some signs of recovery in certain parts of the market. Clearly the consumer has remained strong for us," Dell said. Dell said it expects earnings in the third fiscal quarter to rise to 20 cents to 21 cents per share while revenues are seen increasing to $8.9 billion.



It sees unit volumes up 5 percent from the second, driven by government, U.S. consumers and early holiday sales. Analysts have expected Dell to report third-quarter earnings of 20 cents per share on revenue of $8.56 billion, according to Thomson First Call. "It is certainly a bullish outlook. Maybe the U.S. corporate market is reaching a state of stabilization, which is potentially a good thing for more people than just Dell," said Marty Shagrin, an analyst at Victory Capital, which owns Dell shares.



Dell shares rose in after-hours trade to $27.20, after having initially topped $27.40. Dell shares had closed at $27.14 in regular Nasdaq trade. Dell said that revenues rose to $8.5 billion from $7.6 billion a year earlier. Dell gave guidance on July 11 for earnings of 19 cents per share on revenue of $8.3 billion.



Dell said that shipments of computer servers, which are large computers used by businesses, were up 20 percent in the second quarter and with data storage systems accounted for 20 percent of revenue. Dell also said it is ahead on its plan to wring $1 billion out of costs this year. Dell's performance was impressive, Shagrin said, but he noted that the stock is rather expensive. Dell trades at about 35 times fiscal 2003 earnings.



"It is still a rich stock...for what is still predominantly a PC company," he added. "We probably would not be adding to positions given the valuations here." While the broader Nasdaq market and the American Stock Exchange Computer Hardware have both dropped by about one-third, Dell shares have given up less than one percent so far this year.



(Additional reporting by Peter Henderson in San Francisco)



© Reuters

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