Dell earnings rise with shipments

The Round Rock, Texas, PC maker turned a profit of $598 million, or 23 cents per share, on revenue of $9.5 billion for the first quarter of fiscal 2003, which ended May 2. That compares with earnings of $457 million, or 17 cents per share, on revenue of $8.1 billion in the same period a year ago.

The results match analyst expectations, according to First Call. Dell also met its own predictions for the quarter, which were made in April.

"Dell's unique ability is innovating, integrating and delivering technology with the best possible value, and our execution in those areas has never been better," CEO Michael Dell said in a statement.

Dell saw its total worldwide PC shipments increase by 29 percent on a year-over-year basis. Dell server shipments, an important area for the company, rose by 40 percent, the company said.

Looking ahead, Dell predicted more of the same for its second fiscal quarter. Revenue is expected to go up 15 percent, to about $9.7 billion, while earnings per share will increase to 24 cents, the company said. Dell expects unit shipments to grow about 25 percent year-over-year, compared with 3 percent growth predicted for the industry.

Dell, whose stated goal is to reach $60 billion in annual revenue, is banking on continued market share gains in the worldwide PC market. The company's executives have said that, for every percentage point of market share it accrues, Dell also takes in roughly $2 billion more in revenue per year.

To hit the $60 billion target, Dell would have to increase its share of the PC market to nearly 30 percent. The company believes that it can reach that goal by adding new customers, especially businesses that buy servers. (Server models priced under $25,000 are included in PC market share numbers.) It will also woo businesses with storage systems and its suite of in-house professional services. After it adds a new customer, Dell will work to increase the amount of that customer's budget spent buying Dell products. Company executives refer to this practice as boosting Dell's "share of wallet."

So far, the plan seems to be working. Dell saw its share increase to nearly 17 percent during the first quarter. The company also gained back the top spot in the worldwide PC market from rival Hewlett-Packard, despite HP's move to match Dell's prices.

But regardless of Dell's track record, some analysts are concerned about the prospects for the PC market this year.

A drop in PC sales to U.S. state and local governments could pose at least a small risk for the second quarter, because many are wrestling with budget shortfalls, Steven Milunovich, an analyst with Merrill Lynch, said in a report earlier this week.

"The most likely driver of softer sales would be state and local government spending, including education," Milunovich said. "Government and education is typically the biggest sequential growth driver in the July quarter. While federal demand has held up well, we remain concerned about state and local spending. Educational spending at the K through 12 levels is particularly important in the July quarter, and the state and local budget crises make this a key wild card for the quarter."

At the same time, a large-scale turnaround in the PC market has not yet been seen and is likely to be tied to an economic recovery, the timing of which is uncertain.

Because of that uncertainty, Gartner earlier this week revised its 2003 forecast for the worldwide PC market downward. The research company now predicts a unit shipment increase of 6.6 percent, down from its earlier estimate of a 7.9 percent increase. The market, Gartner said, will total about 136.9 million units versus its earlier projection of 138.7 million units.

Dell executives are still hoping for the best--a turnaround that begins by the end of this year--but the company is prepared for the worst, Kevin Rollins, Dell's president, said in a conference call following the earnings release.

"Regardless of what is happening in the industry, our strategy is to widen Dell's competitive advantage and profitably gain market share," Rollins said.

The most likely scenario for the market is somewhere in between, suggested Jim Schneider, Dell's chief financial officer.

Dell has now seen several quarters of growth. But, Schneider said, "what we're saying is we don't see any significant recovery. Things have stabilized here--this is with us continuing to be aggressive on pricing to take more market share."

But despite analysts' concerns, Dell's second-quarter sales to government and education are so far on track, Rollins said in a later conference call with analysts.

Printers, SARS and SCO
Right out of the gate, Dell's new line of Dell-branded printers surpassed expectations, selling about twice as many units as forecast, Dell executives said. The company will launch new printer models later in the year, but it does not expect its printer business to have a major impact on its earnings in the near future.

Executives said in a conference call that Dell has had one potential severe acute respiratory syndrome (SARS) case in its Taiwan office. The company closed that office, asking employees to work from home. It will reopen next Monday. Dell's business has otherwise been uninterrupted, Rollins said, because those employees can use Dell's Web-based business tools.

The company also recently received a letter from SCO Group. SCO claims that its intellectual property for the Unix operating system has been illegally incorporated into Linux. SCO sued IBM in March, claiming that the company used SCO trade secrets to enhance Linux at IBM. Earlier this month, SCO sent letters to about 1,500 companies warning them that they could be liable for using Linux. But so far, Dell--which offers Red Hat's version of Linux--says nothing has changed.

"We're communicating to our customers, and we're talking with our Linux partner Red Hat to keep abreast of the situation," Rollins said. "But for now (it's) business as usual for Dell and our customers."

Finally, Dell executives confirmed that the company is working on a personal digital assistant (PDA) with built-in wireless networking. Dell's first wireless PDA will most likely incorporate 802.11 wireless networking. But Dell also is looking at a PDA with built-in General Packet Radio Service (GPRS), the executives revealed.