THE DAY AHEAD: Dell benefits from lower expectations, outlook

What a difference a few quarters makes. If Dell Computer (Nasdaq: DELL) merely met top line and bottom line expectations a few quarters ago, the company's stock would have been pummeled.

In fact, Dell shares typically fall after earnings even when the results easily hurdle expectations.

So why will Dell get a break when it merely meets third quarter estimates with earnings of 18 cents a share on revenue of $6.78 billion?

Dell: On the rise again?

The expectations game has changed and that could be good news for Dell shares. Dell's results weren't surprising, but Wall Street is breathing easier because the quarter could have been worse and the outlook is positive.

For once, Dell is in a position where it can actually beat Wall Street's estimates. It took a spike in memory prices, an earthquake in Taiwan and component shortages to bring expectations down a bit, but estimates are now lower. Under these new expectations a quote such as "our guidance for the fourth quarter is unchanged" qualifies as good news.

There were a lot of good things coming out of Dell's conference call though. Dell CEO Michael Dell said the company can work around any Year 2000 problems. "We don't anticipate any impact," he said. Fourth quarter sales growth should be in line with historical estimates. CFO Tom Meredith, however, was looking at last year's fourth quarter sequential growth of 7 percent instead of the prior year's double-digit clip.

Does Dell grow the way it used to? No and officials are even admitting it. "It's more reasonable to assume a more moderate rate of growth because of the law of large numbers," said Meredith.

And margins are getting squeezed. Dell said its fourth quarter goal is to "allow margins to recover lost ground" by raising prices if needed.

The glory days may be behind it, but Dell is still the fastest growing PC company and Wall Street will take what it can get.

Dell could see some possible Y2K hiccups in the enterprise market and "choppy" component prices, but the biggest threat to the PC maker's fourth quarter will be execution. "Execution is our primary challenge going forward," said Meredith. If surprises emerge, Dell officials said they were confident they could manage around them.

Even with Dell's un-Dell-like quarter, the results were still impressive. Sales were strong in Asia and Europe and high-margin products such as servers and storage products accounted for 17 percent of sales. Sales of Dell Inspiron and Latitude notebook computers increased 55 percent from a year ago and 12 percent sequentially. Without shortages, notebook sales would have been stronger, said Dell.

A few quarters ago, you would have expected Dell to take its lumps after a quarter like this. With the lower expectations in place, Dell will get a break.>