Notebook sales help boost Dell earnings

This blog has been updated with Dell executive and analyst comments.

It's not a blow-out quarter, but Dell investors will likely be pleasantly surprised.

The Round Rock, Texas, PC maker reported its first-quarter earnings Thursday, with revenue of $16 billion, a 9 percent improvement from a year ago, and earnings of 38 cents per share, a 12 percent increase.

Analysts were expecting earnings of 34 cents per share and revenue of $15.4 billion to $16.2 billion. In after-hours trading Thursday, shares of Dell were up 7.5 percent.

Following a turbulent 2007, Thursday's results were a more encouraging beginning for this year. "We're beginning to see positive results in our performance," founder and CEO Michael Dell said during a conference call with company investors Thursday afternoon. He pointed to growth in all business segments in all regions as the impetus. He said that while the industry grew 14 percent in unit shipments, Dell was able to grow 22 percent.

But is this the comeback that Dell has been promising, and investors have been waiting for? Not quite. However, it appears the company is at least on the right track. Though the No. 2 PC vendor in the world has fallen behind both HP and Acer in notebook sales, Dell showed improvement in the past year. Notebook revenue was up 22 percent over the past year, but just 2 percent from the previous quarter.

"I think our results demonstrate we made some progress, but still a lot more to be done," said outgoing Chief Financial Officer Donald Carty, who is to be replaced by Brian Gladden on June 13.

Cost reduction was one of the company's main goals in the past year. Dell reduced its headcount by 3,700 people during the quarter, many in its consumer products divisions and in international sales, for a total of 7,000 in the past year, according to Carty. The company said in the same quarter a year ago it planned on removing 8,800 positions. Dell also said it has added about 2,700 employees through acquisitions, bringing the net employee reduction to 5 percent, and Carty emphasized that more thinning of company ranks is coming.

It's been over a year since Michael Dell hit the reset button, promising to revitalize his company that had fallen behind its main competitor, Hewlett-Packard. Dell admitted publicly at D6 Wednesday that his company had indeed missed a few very big trends, including retail and a focus on consumer products.

It was also a year ago that after telling his employees the company's hallowed direct model was no longer "a religion," Dell products first began showing up in Wal-Mart stores. Now Dell PCs and printers are available at many of the major electronics retail outlets worldwide.

Carty specifically pointed to retail initiatives as one of the driver's of the better-than-expected quarterly performance. Dell added 2,000 more retail locations worldwide in the past quarter, including Costco in the U.S., Best Buy in Canada, and several large Chinese outlets, to bring the total to 13,000 locations around the world.

But it's still too early to tell if the company's momentum in retail can be sustained.

"Are they getting a pop because they've just entered retail?," asked John Spooner, analyst with Technology Business Research. "Retail didn't get it fully in place until this January, so I wouldn't pass judgment until Q4 this year."

Unfortunately the timing isn't great in regard to the U.S. economy. In the earnings announcement, Dell acknowledged "conservatism in IT spending in the U.S. particularly with its global and large customers as well as public, small, and medium business accounts." The company said it expects the conservative spending trend to continue on through summer.

However, the company is making huge gains internationally. For the first time in the company's history, sales outside of the U.S. reached 50 percent. Dell particularly has its eye on the booming Chinese market.

"We believe China is going to become the largest retail market in the world for PCs," Michael Dell said. Dell's unit sales increased 140 percent in China over the last year, and the company plans to reach 3,500 retail locations in China alone by the end of the next quarter.

China, as well as India, are becoming the place for Dell to experiment, not only with products, but with different business models and with customers with no previously established sense of what to expect from Dell.

"In China you can blast out a run of 1 million notebooks, call them Dell 'X,' sell to distributors, and do pretty well," said Spooner. It's a great way for the company to test out products and market strategies before bringing them to their more established markets.

And it's clear there's still more change to come. Michael Dell said the company is still planning to introduce many more new notebook models by the end of this year. He specifically mentioned an "active back-to-school" season. Besides the already announced Latitude E series, it will be interesting to see if this is when Dell decides to introduce the mini-notebook Michael Dell was seen carrying around with him at the D6 conference in Carlsbad, Calif., Wednesday.