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Dell meets third-quarter estimates

Servers and storage systems were two of the company's top earners, helping Dell pull in a profit of 26 cents per share and revenue of $10.6 billion.

Dell on Thursday reported third-quarter revenue that rose 16 percent and a profit that met analysts' expectations on increases in sales of servers and storage systems.

Net income for the Round Rock, Texas, PC maker came in at $677 million, or 26 cents per share. Revenue for the quarter, which ended Oct. 31, was $10.6 billion. During the same period a year ago, Dell reported net income of $561 million, or 21 cents per share, on revenue of $9.1 billion.

Analysts expected Dell to post a profit of 26 cents per share on revenue of $10.5 billion, according to First Call.

"Customers and investors get best value over time from companies like Dell that are growing and financially very healthy," Michael Dell, the company's CEO, said in a statement about the quarter. "The market should insist on both."

Servers and storage systems, which continue to be part of the company's main focus, were two of its top earners in the quarter. Revenue from enterprise systems, which include the two product categories, increased by 32 percent year over year, Dell said. Server shipments increased by 30 percent during the quarter, while storage systems jumped 68 percent from a year ago, the company said.

Looking ahead, Dell predicted that its overall fourth-quarter unit shipments would rise by 25 percent year over year, helping revenue to increase to $11.5 billion and earnings per share to grow to 28 cents.

Dell, which came out early with its earnings statement after discovering that some of the financial information had been posted on its Web site, increased its overall unit shipments by 22 percent year over year during the quarter. Growth in China, France, Germany, Japan and the United Kingdom contributed to the increase.

Despite those rising PC unit volumes and Dell's ability to keep costs low--third-quarter operating expenses were 9.6 percent of revenue--aggressive pricing and component costs may have hampered Dell's profits in the quarter, some analysts said.

"Both Dell and IBM have complained of HP winning deals by pricing below cost. Dell seems puzzled by the behavior; it?s interesting to hear Dell be the one concerned about low-ball pricing," Steven Milunovich, an analyst at Merrill Lynch, wrote in a report this week.

Meanwhile, Bill Shope, an analyst at J.P. Morgan, wrote in a report this week that "PC unit growth has clearly improved in recent quarters. Nevertheless, these volume improvements are coupled with aggressive PC pricing and stable-to-rising component costs, so the unit strength is unlikely to benefit Dell as much as it has benefited many of the component suppliers."

Indeed, price competition among PC makers was intense, and PC component cost declines--particularly on memory and flat panels--slowed during the quarter, said Jim Schneider, Dell's chief financial officer, during a conference call to discuss the company's results.

"The competitive environment was probably as aggressive as ever from a (PC) pricing standpoint," Schneider said.

Competition puts pressure on margins, "but we were able to keep them relatively constant," he added.

Schneider also indicated that he thought supplies of some components would improve during the fourth quarter, though other Dell executives said panels may continue to be in tight supply.

Meanwhile, the addition of Dell brand printers last March and consumer electronics devices this fall may help the company boost its profits in the future. But to date, they haven't had a major impact, Dell executives said.

"In printers, we've shipped 1 million Dell-branded printers so far and we expect that our shipments will increase about 80 percent from the third quarter to the fourth quarter" of 2003, he said during the conference call. "These new products you've seen us introduce are interesting, but I think most of our growth is still coming from the enterprise."

The company's Dell Digital Jukebox, a portable MP3 player, also got off to a "good start," Dell said.

Dell also said it believes the PC market has begun to stabilize, but its executives are still cautious.

"Things have obviously stabilized. We've now had five consecutive quarters of industry growth," Schneider said. "We're seeing a little bit better capital spending from an IT standpoint."

Companies may start to increase spending on computers in 2004, Dell said. The company is seeing a number of its large corporate customers, who have delayed computer upgrades and other projects, show more interest in purchasing technology, now that their financial outlooks have improved, company executives said.

"We're feeling relatively encouraged about the corporate market possibly being a bit better," Dell said. But, "it's really too early to say about the first quarter."

Dell executives also said its average third-quarter sale price for its computers was $1,620, about the same as it was in the second quarter.

Dell is also adding to its employee roster in an effort to prepare for future growth and is planning additional television products and new printers for 2004, the executives said.