Dell shares get boost from strong earnings report

That strong report pushed shares of Dell, the world's second-largest seller of personal computers, up 9.9 percent in late trading Thursday.

Now, investors will try to determine if the results were a one-term wonder or a sign that founder and CEO Michael Dell's turnaround plan is working.

Notebook shipments jumped 43 percent in the first quarter compared with a year earlier. Dell had made them a priority, developing products for emerging markets, and the Round Rock, Texas-based company rang up more sales overseas than at home for the first time in the first quarter.

Revenue rose 19 percent in Asia and 15 percent in Europe, the Middle East and Africa, helping Dell overcome a weak U.S. market where businesses were cutting back on technology spending.

"Dell did relatively well, but it was against low expectations," said Shaw Wu, an analyst with American Technology Research who rates the shares "neutral."

They rose 12 cents Thursday, closing at $21.81 in regular trading before the results were released, then jumped $2.16 to $23.97 in late trading.

Still, the results added to the sense that technology spending "is turning out a little better than expected," Wu said.

"Most of the vendors, from Intel to HP to Apple and Microsoft; the spending has been stronger than feared," Wu said.

Much of that strength has come from overseas. Dell, which is more dependent on U.S. sales than Hewlett-Packard Co., sees U.S. business customers "holding back from spending" on desktops, said Chief Financial Officer Donald J. Carty. He added that U.S. companies may continue to defer technology spending into this summer.

Dell trails HP in worldwide PC shipments but leads in U.S. sales, according to technology research firms IDC and Gartner Inc., but that could make Dell more vulnerable to a slowdown in the U.S. economy.

For the three months ended May 2, Dell earned $784 million, or 38 cents per share, up from $756 million, or 34 cents per share, in the same period last year. Revenue rose 9 percent, to $16.08 billion.

On average, analysts surveyed by Thomson Financial expected a profit of 34 cents per share on sales of $15.68 billion.

Michael Dell, who returned to the chief executive's job in January 2007 after the company floundered, said the company was "executing on all points of our strategy to drive growth in every product category and in every part of the world."

He told analysts on a company conference call Thursday that the strong Asia sales were partly due to a 140 percent surge at 1,800 stores in China that sell Dell machines. By early August, he said, Dell will be in 3,500 Chinese stores.

But skeptics might note--as some analysts on the call did--that Dell's strong first quarter was helped by the weak dollar and unusually sharp job cuts, which might be more difficult to repeat.

Currency rates added 3 to 4 percent to total revenue, Carty said. And the company's strong cost controls resulted in part from cutting 3,700 jobs in the quarter, far more than expected by analysts, who relied on Carty's estimate just last month of about 1,000 cuts.

Dell has eliminated 7,000 jobs in the past year--8 percent of last year's work force--although that has been partly offset by 2,700 jobs added through acquisitions.

Dell is trying to cut costs $3 billion by 2011. Carty, who plans to step down next month, said the biggest challenges for the company now were continuing to control costs and, "We've got to continue to improve the product line."

John Enck, a technology analyst for Gartner, said the better-than-expected resulted indicated that Michael Dell's return refocused the company on controlling costs and repairing relations with business customers.

"The customer experience has been good this year," Enck said.

Barry Jaruzelski, a partner at the consulting firm Booz & Co., said Dell still faces drawbacks in its strategy of augmenting direct sales by phone or Internet with sales made through retail stores.

With retail sales, Jaruzelski said, Dell loses the direct contact that used to give the company immediate feedback on winning pricing and features and an edge over competitors. Now, he said, "They only know what the retailers will tell them, and they have higher overhead rates."

Carty said Dell was making progress in bringing down overhead while boosting retail sales.

But, he added, "Suffice it to say that direct is a lot more profitable than retail."