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Dell shares rally after strong earnings report

Dell's shares jump after high profit margins lead the PC maker to pass analyst expectations by 3 cents.

Shares of Dell Computer rallied today after high profit margins led the computer giant to report earnings of 19 cents per share, passing analyst expectations by 3 cents.

The PC giant's stock climbed $5.19, or 11.61 percent, to $49.88 at the close of regular trading today.

Dell yesterday posted revenues of $7.28 billion and net income of $525 million for the quarter ended April 28. That's 31.5 percent higher than the $5.54 billion in revenues and 21 percent higher than the $434 million in net income Dell pulled in during the same quarter last year.

The company was expected to report earnings of 16 cents per share, according to analysts surveyed by First Call/Thomson Financial.

"They destroyed the numbers," said Robertson Stephens analyst Dan Niles.

"It was about as good a quarter as you're going to get," Niles added. "The top line was better than expected by about $200 million. Gross margins were a lot higher. The bottom line was higher by a lot. Even Europe did better than I had expected."

Dell attributed the strong quarter to sales of servers, storage and PCs associated with use and construction of the Internet.

Its server and portable computer revenues are growing at an annual rate of about 50 percent, providing the company with healthy profit margins, Niles said in a recent report.

However, not all was sunny in Austin, Texas.

During a conference call yesterday, Dell executives said a new high-end storage product is three months behind schedule. The product, based on the technology Dell got when it acquired ConvergeNet in September 1999, is in early testing and likely will be released in the fall instead of the summer, Dell executives said.

While Dell's bread and butter currently comes from computer systems, not standalone storage devices, the company is hoping to make storage a much bigger part of its business.

The ConvergeNet technology will bolster Dell's push to sell more storage systems, a market that other competitors such as EMC, Sun Microsystems, Compaq, Hewlett-Packard and IBM also are scrapping for.

But this quarter, much of Dell's money came from more familiar product lines. About 30 percent of the revenues came from laptop sales, Dell executives said.

In addition, Dell saw its business pick up after Microsoft introduced its new business operating system, Windows 2000, in February, Niles said.

Dell highlighted its Linux sales as well, saying that with Linux and Windows 2000 Dell can address 75 to 80 percent of the computing market. Linux is a clone of the Unix operating system developed by a host of programmers worldwide.

Overall, 2 to 4 percent of Dell computers ship with Linux, but in some markets, such as Internet companies and small or medium-sized businesses, about 25 percent of machines sold come with Linux. In government and research markets, the percentage goes as high as 50 percent, Dell said.

Dell's application service provider effort, called DellHost, now has 2000 customers, Dell added. Half of those customers are selecting Linux.

The company is concerned that prices for computer components might increase in the second half of the year, but executives said Dell is better positioned to deal with the issue than last year.

Niles and Piper Jaffray analyst Ashok Kumar both expected Europe to be a trouble spot for the company.

Dell beat Kumar's estimate of $7.2 billion in revenues and 30 percent revenue growth, though Kumar predicted his estimate might be on the low side depending on how well Dell's investments fared.

Revenues grew 35 percent in the Americas. In Europe, growth was 17 percent. Asian sales surged 47 percent.