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Dell barely beats estimates

It's another big quarter, but faint rumblings are being heard about whether the computer maker can keep up the dizzying pace.

When is beating earnings estimates a pedestrian accomplishment? When you're Dell Computer.

Dell reported revenues of $4.8 billion for the third fiscal quarter of 1999, a 51 percent increase over the same quarter the year before, and net income of $384 million, a 55 percent increase.

Earnings per share came to 28 cents, one cent above consensus estimates from First Call. Sales from the company Web site averaged over $10 million a day.

Nonetheless, the stock closed at $69.67, or $2.27 down from the day before.

The tepid reaction from traders could be the result of faint rumblings that the company cannot continue to grow at the same dizzying pace, some observers have speculated. For more than a year, Dell has grown faster than its chief competitors and more than two to three times faster than the PC market as a whole. During this period, the company has also enjoyed higher average selling prices for its PCs while other vendors have been beating each other up in price wars.

That sort of unparalleled success, however, has led some to ask what Dell can do for an encore.

"The company cannot expect to maintain its historical growth by expanding customer share. It would need to come from market share gains--a difficult proposition in today's competitive environment," said Ashok Kumar, an analyst with Piper Jaffray before the earnings announcement.

Kumar, however, remains bullish on the stock. He predicted earnings per share of 28 cents and rates the company a strong buy.

Scott Miller, PC market analyst with Dataquest, by contrast, sees few weaknesses in Dell's numbers. Still, he acknowledged that Dell faces an issue of beating the sterling financial performance the world now expects. "The issue Dell will face over the next year is not whether they are solid or profitable, it is whether they can keep beating the ever increasing expectations of Wall Street," Miller said.

Last quarter, Dell saw revenues grow 54 percent and earnings grow by 72 percent, better results in terms of sheer growth. Arch-rival Compaq Computer also rolled out a direct buying program aimed at small and medium-sized businesses the day before.

One of the highlights in the third fiscal quarter was the increasing diversity of the company's business. Sales from servers and workstations more than doubled over the same quarter a year ago while laptop sales grew by 93 percent.

Desktop sales, meanwhile, grew but accounted for less of the company's overall revenue than in the same quarter the year before. Desktop sales shrunk to 66 percent of overall revenue, down 72 percent from last year. This will likely be interpreted positively because desktops typically carry lower margins than servers, workstations, and laptops.

Revenue also became more dispersed on a geographic basis. European sales grew by 68 percent and constituted 25 percent of Dell's revenue for the quarter while sales in North America grew by 46 percent. Revenue in Asia-Pacific, meanwhile, shot up 49 percent, an improvement over the 35 percent growth experienced in the first half.