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Dell returns to form with strong quarterly results

Servers, storage and high-end consumer PCs help the company reverse a two-quarter slide and beat expectations.

Dell got its financial performance back on track during its fourth quarter, as corporate products such as servers and storage devices boosted the company's performance beyond analyst expectations.

Revenue for the quarter ended Feb. 3, was $15.2 billion, up 13 percent from revenue of $13.5 billion last year. Analysts polled by Thomson First Call had expected the company to record $14.8 billion in revenue.

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During earnings call, Dell Senior Vice President and CFO Jim Schneider explains why "the first quarter is always the toughest."
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Net income was $1 billion, up 52 percent from $667 million last year. Earnings per share of 43 cents beat analyst expectations of 41 cents per share.

"We now have excellent balance, and the focus is on our enterprise products," Kevin Rollins, Dell's chief executive officer, said on a conference call following the earnings announcement.

Dell singled out a 21 percent increase in worldwide sales to its corporate customers as one of the main forces behind its quarter. Its consumer business, which had dragged down the company in its second and third quarters, was helped in the fourth quarter by a 20 percent increase in shipments of its high-end XPS desktops and notebooks.

The company was also helped by an extra week in this year's fourth quarter as compared with the previous year's quarter, Rollins said. The 14-week quarter added about 2 percent to 3 percent of extra revenue growth to the total, he said.

Revenue for the full year was $55.9 billion, up from $49.2 billion in 2004. Net income was $3.6 billion, a 17 percent increase from the prior year. The growth in the company's XPS lineup helped it improve the margins of its PC business during the quarter, which was a priority coming off the last operating period, Rollins said. Notebooks continued to provide the majority of Dell and the overall industry's growth, with a 47 percent jump in shipments and a 22 percent jump in revenue from mobility products, which includes notebooks, personal digital assistants and Dell's music players.

Dell's storage business was its fastest-growing segment during the fourth quarter, with a 41 percent growth in revenue. Services revenue grew 26 percent. Over the last year, Dell has been trying to change its perception as a low-cost PC manufacturer to that of an enterprise IT vendor that can offer everything from notebooks to storage-area networks. Services and storage still represent only 12 percent of the company's overall revenue, but they are gaining ground on its other businesses.

Despite the positive results, analysts repeatedly questioned Dell on its outlook for the first quarter, which fell below previous expectations. The company said it expects first-quarter revenue to be between $14.2 billion and $14.6 billion, down about 5 percent compared with the fourth quarter. Analysts had predicted first-quarter revenue of $14.7 billion prior to Thursday.

Revenue at hardware companies tends to be flat or slightly down going from the fourth quarter to the first, because the fourth quarter is a much more active buying period for PCs than the first. But analysts peppered Rollins and Dell Chief Financial Officer Jim Schneider about what they perceived to be overly conservative guidance for the quarter, asking if the company anticipates a slowdown in the hardware market.

"The first quarter is always the toughest quarter for us," Rollins said. But Dell is still growing faster than the industry and demand for its products remains strong, he said.

Rollins addressed the perennial question about Advanced Micro Devices' chips amid growing speculation of an imminent deal between the companies. have gone predicting that this will be the year that Dell decides to use AMD's chips in its products. But rumors of that sort have persisted for several years, often fueled by pointed comments from Dell executives. There's a widespread industry belief that Intel provides Dell with discounts in order to stay faithful to its chips and to help Dell lower its costs, and that Dell occasionally signals it might be interested in AMD as a way of wringing concessions from Intel.

But the standard line was in fashion Thursday. Rollins said that while his company is always evaluating technology, "we are still buying our processors from Intel." Dell's customers appear to be happy with its products, he said, citing its fourth-quarter growth.

Dell's business outside of the U.S. grew strongly, with shipments to Europe, the Middle East and Africa up 25 percent and shipments to Asia up 27 percent. In the closely watched Chinese market, Dell's shipments grew 28 percent and profits improved, the company said.