Dell Meets 1Q Estimates, But Analysts Cautious

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Dell Computer Corp., Round Rock, TX, posted first-quarter profits this week that were in line with expectations for the period ended April 30, but analysts expressed concerns about margin pressures from declining prices and possible weakening demand in the United States.

Dell earned $434 million, or 16 cents per diluted share, in the first quarter, up 42 percent over profits of $305 million, or 11 cents per share, in the year-ago first quarter. Revenues grew by 41 percent, to about $5.54 billion, vs. $3.92 billion in the year-ago period.

"First of all, it was an excellent performance," said Robert Anastasi, an analyst at Robinson Humphrey LLC, Atlanta. "I think the thing that worried people was the extent of the decline in sequential gross margins [as a percent of revenues]. That was more than people expected."

Dell said its gross margins for the quarter were $1.19 billion, or 21.5 percent of revenues, compared with $873 million, or 22.3 percent of revenues, in the year-ago period. In the fourth quarter ended in January, the company had posted gross margins of $1.16 billion, or 22.4 percent of revenues.

Part of the margin pressure came form the declining prices of personal computers. The company said its average selling price for PCs in the quarter was $2,300, down about 7 percent from $2,745 in the first quarter of a year ago and about 2 percent lower than $2,350 in the fourth quarter of last year.

"[Average prices] declined 7 percent year-over-year, driving operating margins down 70 basis points sequentially to the lowest level in six quarters," Daniel T. Niles, managing director at BancBoston Robertson Stephens, San Francisco, wrote in a report reiterating his position of near-term caution on Dell.

He also said Dell projected that its revenues would grow 5 percent sequentially in the second quarter, which translates to 35 percent growth vs. the second quarter of last year.

"That is the lowest year-over-year growth in more than four years," he wrote. "We believe that Dell is at the crossroads of growth or profitability, but not both."

Ashok Kumar, an analyst with Piper Jaffray, Minneapolis, issued a report saying that he thought margins would stabilize at their current levels, and he lowered his earnings estimates for the next two years. He maintained an aggressive buy rating on the stock, however.

Several other analysts also either downgraded the company's stock or revised their earnings outlook.

Anastasi, however, said he actually raised his earnings projections for company, predicting 70 cents per share in the current fiscal year, which ends in January, 2000, and 89 cents in the following year. He said he had already assumed lower margins going forward in his previous estimates, and increased his estimates to be more in line with consensus opinion.

He remained cautious in is outlook for the rest of the year.

"Being able to maintain what have been extremely high margins is not a layup from here," he said. "It's just physics. You can't continue to grow revenues and margins like they had been."

Dell's stock has been trading in the low $40's since splitting two-for-one earlier this year. After last week's earnings announcement, it fell about 10 percent in the next day's trading, hitting a low of $39.

The quarter produced mixed results geographically for Dell, which said it suffered from difficult competitive circumstances in Germany during the period. Revenues from its Americas region grew 45 percent year-over-year, led by a 54-percent increase in sales to consumers and small-business customers. European revenue increased 29 percent, and the Asia-Pacific region rose 48 percent, which the company attributed in part to strong sales in China.

The company also said its enterprise products, including servers, workstations and storage products, grew 97 percent in the quarter, year-over-year, and comprised 16 percent of sales for the period.

The company said its Web site received 25 million hits during the quarter. Sales generated by the site were $18 million per day, accounting for 30 percent of overall revenues. The company also said its application of the Internet to other parts of its business, including procurement, customer support and relationship management, also is approaching 30 percent of overall business.

"The competitive advantages of Dell's direct model have never been as distinct and extensive as they are today, and we expect to continue to grow at a multiple of the industry rate," said Dell CEO Michael Dell in a prepared statement.

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