Dell increases sales, beats analysts' estimates

Despite some ambivalence about long-term profitability for PC manufacturers, the company continues on its upward trajectory by posting earnings of $507 million this afternoon.

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Despite some ambivalence about long-term profitability for PC manufacturers, Dell Computer continued on its upward trajectory by posting better-than-expected earnings of $507 million this afternoon.

In its second fiscal quarter for 2000, Dell reported earnings of 19 cents per share, compared to 12 cents per share for the same period a year ago. Net earnings totaled $507 million, an increase of 46 percent over year-ago results.

For its second fiscal quarter, the company was expected to report earnings per share of 17 cents, according to a consensus estimate on First Call.

Revenue grew to $6.14 billion for the quarter, an increase of 42 percent compared to year-ago results of $4.33 billion, the company said.

The company continues to increase the amount of business it conducts over the Internet, selling $30 million a day worth of products--about 40 percent of its overall sales--through its Web site. This is an indicator of how quickly the company is moving to make sales operations more efficient by selling over the Internet. One big area of growth was sales to consumers over the Internet.

Dell said sales to consumers increased 100 percent from the previous quarter, with more than half of those sales conducted online. In fact, Dell appears to be claiming to have taken the lead over direct rival Gateway in the combined consumer and small-business market.

"We are now the largest direct company within the worldwide home and small-business market, and are significantly more profitable in that space than our nearest direct competitor," Dell chief executive Michael Dell said in a statement.

What the future holds remains up for debate. Some analysts believe that price pressures and other factors will begin to sap the profitability out of the PC industry. But, while few discount the reality of declining prices, others point out that Dell's business model, history, and ability to anticipate trends insulate it from some of the problems facing others.

PC manufacturers, for instance, have been grappling with how to make money off of sub-$1000 and -$500 machines, one of the fastest growing segments in the market. So far, Dell has been able to avoid deeply engaging itself in these markets yet still continues to grow faster than the rest of the industry.

Clearly aware of concerns over dropping prices, Dell executives said today in a conference call that over 65 percent of desktop PC revenue comes from systems with Pentium III processors, the Pentium III being the latest and most expensive Intel chip currently available. Also, CFO Tom Meredith said the company will soon be adding Pentium III processors to both lines of notebooks, and the company will offer a new ultraportable soon, all of which should help keep average selling prices up.

As for the "free PC" movement, Dell seemed inclined to continue to avoid playing that game. Meredith said: "We will continue to focus on lifetime value, not one-time rebates."

Dell later remarked that although there are a variety of ways to subsidize PC costs, "The rules of economics have not changed. You still have to pay for it in the end," adding that he thought there may be a backlash from consumers over the restrictive terms and conditions of free PC deals.

Despite such concerns, consumers have been snapping up PCs subsidized by Internet service fee rebates at a rapid clip. (See related story.)

"They execute well and they pursue only profitable businesses," said Kurt King, an analyst at Banc of America Securities, in an interview before the results came out. "They have the most efficient business model in the industry. There is no reason Dell can't continue to grow through sucking up market share."

"The outlook is incredibly strong," said Dan Niles, an analyst at BancBoston Robertson Stephens, who predicted revenue of $6.1 billion prior to the call.