Dell rolls on in Q1 - profits up 31 per cent

Dell Computer on Thursday reported that its first quarter profits rose 31 per cent, matching analyst expectations, as PC and server shipments showed robust increases.

The Round Rock, Texas-based PC-maker turned a profit of $598m on revenue of $9.5bn for the first quarter of fiscal 2003, which ended on 2 May. That compares with earnings of $457m on revenue of $8.1bn in the same period a year ago.

The results match analyst expectations, according to First Call. Dell also met its own predictions for the quarter, which were made in April.

Paul Bell, Dell VP and president EMEA, said: "This has been one of the most consistent quarters for us across all the regions globally. Budget pressures are playing to our strengths as customers everywhere are going to standards-based systems."

Dell saw its total worldwide PC shipments increase by 29 per cent on a year-over-year basis. Dell server shipments, an important area for the company, rose by 40 per cent, the company said.

Looking ahead, Dell predicted more of the same for its second fiscal quarter. Revenue is expected to go up 15 per cent, to about $9.7bn, while earnings per share will increase to 24 cents, the company said. Dell expects unit shipments to grow about 25 per cent year-over-year, compared with 3 per cent growth predicted for the industry.

Dell, whose stated goal is to reach $60bn in annual revenue, is banking on continued market share gains in the worldwide PC market. The company's executives have said that, for every percentage point of market share it accrues, Dell also takes in roughly $2bn more in revenue per year.

To hit the $60bn target, Dell would have to increase its share of the PC market to nearly 30 per cent. The company believes that it can reach that goal by adding new customers, especially businesses that buy servers. (Server models priced under $25,000 are included in PC market share numbers.) It will also woo businesses with storage systems and its suite of in-house professional services. After it adds a new customer, Dell will work to increase the amount of that customer's budget spent buying Dell products. Company executives refer to this practice as boosting Dell's "share of wallet".

So far, the plan seems to be working. Dell saw its share increase to nearly 17 per cent during the first quarter. The company also gained back the top spot in the worldwide PC market from rival Hewlett-Packard, despite HP's move to match Dell's prices.

But regardless of Dell's track record, some analysts are concerned about the prospects for the PC market this year.

A drop in PC sales to US state and local governments could pose at least a small risk for the second quarter, because many are wrestling with budget shortfalls, Steven Milunovich, an analyst with Merrill Lynch, said in a report earlier this week.

At the same time, a large-scale turnaround in the PC market has not yet been seen and is likely to be tied to an economic recovery, the timing of which is uncertain.

Because of that uncertainty, Gartner earlier this week revised its 2003 forecast for the worldwide PC market downward. The research company now predicts a unit shipment increase of 6.6 per cent, down from its earlier estimate of a 7.9 per cent increase. The market, Gartner said, will total about 136.9 million units versus its earlier projection of 138.7 million units.

Dell executives are still hoping for the best - a turnaround that begins by the end of this year - but the company is prepared for the worst, Kevin Rollins, Dell's president, said in a conference call following the earnings release.

"Regardless of what is happening in the industry, our strategy is to widen Dell's competitive advantage and profitably gain market share," Rollins said.

The most likely scenario for the market is somewhere in between, suggested Jim Schneider, Dell's CFO.

Dell has now seen several quarters of growth. But, Schneider said: "What we're saying is we don't see any significant recovery. Things have stabilised here - this is with us continuing to be aggressive on pricing to take more market share."

But despite analysts' concerns, Dell's second-quarter sales to government and education are so far on track, Rollins said in a later conference call with analysts.

Right out of the gate, Dell's new line of Dell-branded printers surpassed expectations, selling about twice as many units as forecast, Dell executives said. The company will launch new printer models later in the year but it does not expect its printer business to have a major impact on its earnings in the near future.

Dell's Bell said sales of printers as well as Axim PDAs - which have sold well since their debut last November in the US and February in the UK - are "not material to our financial results yet but together they're a good business for us". The company's software and peripherals group would bring in around $4bn per year at its current rate of sales.

Plans for Axim models connected to Wi-Fi and GPRS networks are afoot. The company declined to say when Dell-branded printers will be sold in Europe though they are expected in coming months.

John G Spooner writes for CNET News.com. silicon.com's Tony Hallett contributed to this report.