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THE DAY AHEAD: Dell puts Y2K hangover to rest

Larry Dignan
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Larry Dignan
3 min read

That lingering Year 2000 hangover appears to be history. Dell Computer (Nasdaq: DELL) will perk up the PC sector with news that corporate sales are back on track. Dell's outlook echos IBM's (NYSE: IBM) comments earlier this week.

The corporate sales outlook was topic of the day on Dell's first quarter conference call.



Dell: Rolling again?




In the fourth quarter, Dell said a Y2K spending freeze dinged the direct PC maker. IBM said the same thing, as did a host of other PC makers.

Kevin Rollins, vice chairman of Dell, said the Y2K worries are history. Rollins said corporate accounts rebounded in mid-quarter and picked up late in the first quarter. Corporate spending is tracking normal seasonal patterns. "The Y2K slowdown has ended," he said.

That'll be music to the PC sector's ears. Dell easily hurdled Wall Street estimates Thursday with first quarter earnings of $525 million, or 19 cents a share. Earnings tracking firm First Call Corp. projected earnings of 16 cents a share. Investment income added about 2 cents a share to Dell's first quarter. Dell said investment income will continue to boost earnings going forward.

Revenue for the quarter was $7.3 billion, up 31 percent from a year ago and in line with projections.

Dell showed decent -- if not great -- corporate sales. Sales to medium to large enterprises were up 24 percent in the quarter, with April showing nice gains. The growth, however, was still weak compared to home/small office sales growth of 58 percent.

But why nitpick? Compaq's (NYSE: CPQ) corporate sales fell, as did Gateway's (NYSE: GTW). Even Microsoft (Nasdaq: MSFT) went the Y2K hangover route when it talked down expectations for Windows 2000. Microsoft said corporations were holding out until June.

Financial chief James M. Schneider didn't tell analysts to boost estimates for the company, but was optimistic about the outlook. "Demand is in line with what we expected," he said.

The company reiterated its projection calling for growth of about 30 percent. The first quarter wasn't a home run by any stretch, but just reiterating previous guidance could be viewed as good news to skittish investors.

Diversification pays

Dell can attribute much of its quarterly success to outside-the-box sales. Services and Dell's e-commerce properties (Gigabuys and Dellware) contributed 15 percent of sales in the quarter.

Meanwhile, Dell's Web hosting and storage businesses are getting traction. Services sales topped $500 million for the first time, up 50 percent from a year ago. Dell officials said they plan to continue heavy investments in outside-the-box ventures.

Like Gateway, Dell sees the PC as only an entry point to other revenue streams.

Odds and ends

  • Europe sales remain a problem. Europe grew at 17 percent in the first quarter, well below Dell's overall rate of revenue growth in the low 30 percent range. Officials said most of the problems are the company's fault. By the second half, however, Dell's Europe sales should match the rest of the company's growth rate.

  • Dell said it sees Linux systems representing about 2 percent to 4 percent of its shipments in upcoming quarters.

  • Component supplies will remain tight, but Dell said it is well-equipped to handle the changes. Meanwhile, average selling prices will remain steady -- unless component costs fall again.

  • As for Intel's (Nasdaq: INTC) recent glitches, Dell said its products are "clean as a whistle." Dell spotted the Intel glitches ahead of time and adjusted accordingly.

    Intel said on Thursday a defect in its 820 chip set, which helps the microprocessor brain communicate with the rest of the system, could cause some systems to suddenly reset, reboot or fail and distort data in some cases.


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