Consumer demand helps Dell bottom line

The Round Rock, Texas-based PC maker reported net income of $456 million, or 17 cents a share, compared with net income of $434 million, or 16 cents a share, in the same period a year ago.

Analysts polled by First Call had predicted earnings of 17 cents a share.

Dell also said it expects to earn 16 cents a share for its fiscal first quarter, which matches First Call's current forecasts.

Dell's fourth-quarter sales were $8.1 billion, beating revised guidance issued in January. At that time, Dell told analysts to expect quarterly sales around $8 billion, up from earlier predictions of $7.6 billion set last November. At the same time, Dell bumped its earnings-per-share guidance to 17 cents a share from 16 cents.

The majority of Dell's fourth-quarter gains came from its consumer PC business, the company said.

Dell benefited from two unexpected trends in its fourth quarter. First, consumer demand for PCs bounced back because of strong holiday sales. At the same time, those who purchased PCs tended to buy more feature-laden--and more expensive--models fitted with flat-panel displays or DVD-recordable drives.

For the first quarter, Dell said it expects a seasonal decline in consumer PCs to combine with slow demand from corporations, resulting in a 10 percent sequential decline in PC shipments industrywide.

First-quarter shipments and revenue are expected to fall by 3 percent to 5 percent, CEO Michael Dell said in a statement, adding that this will outperform the industry.

For its fiscal year 2002, the company reported net income of $1.25 billion, compared with net income of $2.12 billion in 2001. Before charges, it earned $1.78 billion, or 65 cents per share, in 2002. Analysts polled by First Call had expected Dell to report earnings of 66 cents a share.

During 2001, the company was the only PC maker to consistently turn a profit. Dell was also the only PC maker to increase its market share. It went from 11.7 percent of the market in the fourth quarter of 2000 to 14.2 percent in the fourth quarter of 2001, according to IDC, while the worldwide PC market shrank by about 5 percent.

The gains came in part from Dell's manufacturing, inventory-management and distribution system, which is considered by analysts to be more efficient than those of its competitors. Dell, for example, held components in inventory for only four days during the quarter. This efficiency lets the company quickly pass on to customers component price declines, which were rapid during 2001.

Dell combines these manufacturing advantages with lower component costs, negotiated based on its higher sales volumes. As a result, it costs the company less to manufacture and sell a PC. Thus, Dell executives have said, the company makes more money for each PC it sells, even when the price is lower than that of a PC from a competitor.

This combination gives Dell the ability to offer lower prices than competitors but still turn a profit. This has led to Dell's large gains in market share over 2001, allowing it to steal share from competitors even as the overall PC market has declined.

"So far, so good," said Loren Loverde, an analyst with IDC. "Our look at the fourth-quarter (market share) numbers showed that the...retail and consumer segments were strong, which benefited vendors serving those markets, such as HP (Hewlett-Packard). We think that was primarily a fourth-quarter trend, but Dell should continue to gain share in the first quarter."

Moving beyond the PC
Despite Dell's successes in the PC market, Michael Dell admits that the company must expand beyond the PC to maintain its momentum and profitability.

Dell began this expansion some time ago by moving into the server segment of the PC market. The company's enterprise-systems sales, which include servers, rose by 12 percent year over year in its fourth quarter in 2002.

But that's not enough. Dell has to move into other areas as well. As a result, the company has begun new efforts in storage, networking and communications.

Meanwhile, the company also appears poised to begin a new push into information technology-related services. Dell has partnered with third parties, such as Unisys, in the past to provide services for its hardware.

Dell recently hired former Compaq Computer executive Jeff Lynn to beef up Dell Technology Consulting (DTC), its in-house consulting group, and to expand Dell's role in the services market.

DTC, a group of roughly 1,000 employees, is responsible for working with the company's largest customers to plan big projects, such as installation of a new companywide e-mail system.

While Dell will count on servers, storage, networking and services to secure its future, it still believes its bread-and-butter PC business will come back to life sometime in 2002.

Dell executives have been eyeing pent-up demand among corporations, which have put off PC upgrades because of the soft economy. The last major PC upgrade cycle occurred from late 1998 through early 1999, when companies replaced PCs that could not make the so-called Y2K transition.

Because of this, Dell executives have said, 30 percent of desktops and 25 percent of laptops in use today by businesses--about 150 million PCs--are three or more years old and ready for replacement.

"You can't push those (upgrades) out forever," Dell said in a conference call with reporters Thursday evening. "That's an opportunity for us."

But whether a new upgrade cycle will begin soon remains a major question. Certain indicators seen by Dell, such as increases in the price of DRAM or spot shortages of other components, such as LCD displays and DVD-recordable drives, point to a recovery in demand. But Dell's outlook remains conservative.

"We believe the upgrades are going to come, but it's dependent on the economy," Dell said.