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Dell's 2Q beats estimates
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August 10, 2000: 6:50 p.m. ET
Net income exceeds estimates, but revenue growth disappoints some
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Dell Computer on Thursday turned in a fiscal second-quarter profit that was slightly ahead of Wall Street's expectations on the strength of an improved product mix and favorable component costs.
The Round Rock, Tex.-based company, the world's second-largest personal computer maker and the largest direct seller of PCs, said its net income rose 19 percent to $603 million in the period ended July 28, up from $507 million in the same period last year.
The company's second-quarter earnings per share rose to 22 cents, a 16 percent increase from 19 cents in the comparable quarter. That was one cent better than the 21 cents per share analysts polled by earnings tracker First Call had expected.
Revenue rose 25 percent to $7.67 billion from $6.14 billion during last year's second quarter. That was about $200 million lower than analyst estimates and Dell's internal expectations. It also was below Dell's historical revenue growth rate of 30 percent, although Dell did achieve a margin improvement over the first quarter.
Operating income as a percent of revenue was 9.6 percent, a full percentage point higher than in the first quarter. Net income was 7.9 percent of sales, up from 7.2 percent in the first quarter, and down slightly on a year-over-year basis.
"Our second-quarter results and expectations for strong industry demand in the second half of the year keep us on track toward our goal of 30 percent full-year sales growth," said Michael Dell, the company's chairman and chief executive officer, in a news release. "There remains tremendous room for expansion in all product categories, customer groups and regional markets, and the fundamental advantages of our direct model are more compelling than ever."
James Schneider, who took over as Dell's chief financial officer last March, attributed the revenue shortfall to a significant slowdown in sales of corporate PCs in Europe and slower growth in government sales.
While Dell's results were solid, they weren't good enough to satisfy some securities analysts, who had higher revenue expectations for the company.
"Expectations were already pretty high coming into this earnings period," said Bank of America Securities analyst Kurt King on CNNfn. "The results are a real disappointment relative to what anyone would have expected going back just two or three weeks."
The percentage of Dell's revenue that comes from products other than desktops continued to increase in the second quarter. Revenue from servers, storage products, workstations and notebook PCs rose to 49 percent of total sales, up from 40 percent in the same period last year.
At the close of Nasdaq trading Thursday, before the earnings were released, Dell (DELL: Research, Estimates) shares edged down 1/16 to 41-3/4. In after-hours trading, they dipped 1-1/2 to 40-1/4. The company's stock has zigzagged between 40 and 50 for most of the past 12 months.
Expectations for third and fourth quarters
Dell's Schneider said he is confident that demand for Dell's products will remain strong for the rest of 2000, enabling the company to maintain its 30 percent revenue growth target for the full year. Schneider said he expects third-quarter revenue to be about 10 percent higher than in the second quarter, which implies a total of $8.44 billion.
The Dell CFO also said that the company expects to be able to manage its supplies of key components, such as Random Access Memory. The company expects its operating margin to rise to 10 percent in the fourth quarter and total 9 percent for the year as a whole. Net income as a percentage of sales should be 8 percent in the third quarter and "just below that" for the full year, Schneider said on a conference call with analysts.
Interest income and gains from venture capital investments will be an important part of Dell's results going forward, averaging $125 million per quarter, Schneider added.
Growing at twice the industry rate
Dell's direct-sales model continued to allow the company to increase total quarterly product shipments at almost twice the rate of other large players in the industry. The company's unit growth was 22 percent overall, and faster in enterprise servers, storage products and notebook computers, all strategically important product categories.
Sales beyond base system hardware rose to a record $1.3 billion, as worldwide services revenue reached $577 million in the second quarter, up 35 percent from a year ago. Dell made about 50 percent of its sales through its Web site, averaging more than $50 million per day by the end of the quarter -- an increase from $30 million in the prior year.
Dell generated a record $1.2 billion in cash from operations during the quarter, ending the period with $8.3 billion in cash and investments, a 76 percent jump from the prior year. The company keeps only seven days worth of inventory, protecting it from sudden plunges in PC prices.
Sales of higher-margin corporate computing systems - including network servers, storage products and workstations - increased 46 percent in the quarter. Growth in shipments of Dell Precision workstations was particularly strong, as the company announced that it had become the largest supplier of branded workstations in the U.S.
Notebook computers are another key growth area for Dell, since they have higher average selling prices and faster replacement rates than desktops. Dell's mobile computing sales jumped 60 percent in the second quarter, almost twice as fast as the industry average. 
-- Click here to send e-mail to David Kleinbard
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