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Server and storage sales help Dell to record revenue in Q2
Though question marks remain over SCO's Linux lawsuit...

By Tony Hallett and John G Spooner

Published: Friday 15 August 2003

Dell has reported second quarter profits up 26 per cent, meeting analyst expectations, thanks to increases in unit shipments.

Its net profit was for the three months was $621m. Revenue for the quarter, which ended 1 August, was $9.8bn, figures Dell said were its best to date. During the same period a year ago, Dell reported profits of $501m on revenue of $8.5bn.

During its second fiscal quarter, Dell said it increased shipments by 27 per cent year over year. Desktop PC unit shipments rose by 25 per cent, while server shipments grew by 27 per cent. Its notebook shipments were up 37 per cent, the company said.

Paul Bell, Dell VP and president EMEA, said performance in Europe and Asia-Pacific is ramping up quicker than the company's global rate and the vendor's focus on standards-based computing makes further big gains - especially in servers and storage - sustainable.

The company has profited from a partnership with storage specialist EMC for high-end systems such as storage area networks (SANs) and Bell pointed to strong software relationships with vendors Oracle and SAP.

However, the ongoing litigation by SCO, which is looking for distributors and users of the Linux operating system to pay a licensing fee, could yet prove a thorn in Dell's side, as the company has harnessed Linux, typically provided by Red Hat, for high-end, clustered data centre computing.

Bell told silicon.com: "[The SCO/Linux situation] is more of a question than answer at this point. We haven't seen it affecting buying behaviour at this point."

Some analysts believe Dell could have turned in a larger profit if it hadn't been for rising memory costs. Dynamic random access memory (DRAM) prices have been creeping up over the past couple months, several analysts said this week, increasing costs for the company.

Despite this increase, component costs fell in general in the quarter, executives said.

"We actually saw component costs on an overall basis continue to decline during the second quarter, albeit at a slower rate that we saw in other quarters," Jim Schneider, Dell's chief financial officer, said during a conference call. "We had a memory price increase during this last quarter… but it really didn't have a big impact on our quarter."

Component cost decreases, which had been as much as 1 per cent to 2 per cent per week in past quarters, are likely to slow down to about a half of a percent per week during the third quarter, Schneider said.

But over the long haul, analysts expect Dell to manage the increases in DRAM costs, even if they limit the company's profitability, by shifting its PC configurations and by continuing to expand into higher-profit products like servers and adjacent businesses, including information technology services, printers and consumer electronics.

Over the long haul, analysts expect Dell to manage any cost increases for DRAM or other components by offsetting them with measures such as shifting PC configurations.

Schneider pointed out that the company has continued to cut costs in areas such as manufacturing while expanding into areas such as servers and services, which bring higher average profits. Dell is also moving into adjacent businesses such as printers and consumer electronics. The company's outlook for its third fiscal quarter matched the expectations of analysts polled by First Call. Dell said it expects shipments to increase by 25 per cent or more, resulting in a third-quarter profit of 26 cents per share on revenue of $10.5bn.

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