Dell Profit Up 47%; Consumer, Web Sales Soar
Fueled by growth in its Internet sales to consumers, Dell Computer reported its biggest profit jump in three quarters and joined Hewlett-Packard in saying it sees little cause for worry over a potential slump due to year-2000 concerns.
Dell, based in Round Rock, Texas, said second-quarter profit rose 47% to $507 million, or 19 cents a share, as sales gained 42% to $6.14 billion. Analysts had been expecting 17 cents a share, according to First Call Corp.
The gains were paced by inroads into the consumer market by the largest direct seller of computers and a surge in business conducted over the Internet.
Dell’s Internet sales rose to $30 million a day, up from $18 million in the first quarter, and accounted for about 40% of the company’s $11-billion annual revenue from the Web. That increase makes Dell the largest commercial Web site, Chief Financial Officer Tom Meredith said.
“Overall industry demand is very healthy,” he said one day after giant computer maker Hewlett-Packard also reported better-than-expected earnings. “This momentum should continue,” Meredith said, though profit margins in non-Internet sales could slip.
Dell shares fell 31 cents to $41.13 in regular Nasdaq trading, then rose to $43.13 in after-hours trading following the earnings report.
“We’re looking for a very solid second half,” Dell Chief Executive Michael Dell told analysts during a conference call.
He predicted that industry demand during the second half of the year will be “very healthy” even as companies grapple with Y2K issues.
During the quarter, shipments to consumers more than doubled from a year earlier as Dell took aim at a distracted Compaq Computer, the No. 1 PC maker, and fellow direct seller Gateway. Compaq has been undergoing a retrenchment under its new chief executive, Michael Capellas, that includes thousands of layoffs.
Dell “has competition that is weak and potentially vulnerable, and we think it can continue to grow at a good rate,” said Tim Ghriskey, a portfolio manager with Dreyfus Corp., which owns about 3.8 million Dell shares.
Dell sells PCs directly to customers via telephone orders and the Internet. Compaq, in contrast, uses a chain of distributors and retailers along with online sales.
While other PC makers have faced declining prices, Dell has partially compensated for the declines by boosting sales of more profitable machines such as servers and workstations.
Sales of servers, workstations and data-storage systems rose 85% in the quarter. By boosting sales in those areas, Dell is positioning itself across all segments of the market.
Gains in servers helped make up for lower prices for Dell’s desktop and notebook PCs.
Ghriskey estimates Dell’s average selling price fell to about $2,200 in the quarter from $2,307 last quarter.
“In every segment, Dell’s outgrowing the competition by several factors,” said Richard Schutte, an analyst with Goldman, Sachs & Co., who has Dell on his list of recommended stocks.
Geographically, Dell said revenue from the Americas region grew 48%, led by sales of computer systems to consumers, small businesses and government agencies. Dell’s shipments in the Asia-Pacific region and Japan rose 52%.
But Europe continues to be a weak spot, as revenue growth was a sluggish 24% year-to-year, extending a slowing trend begun earlier this year. Nevertheless, the rate is more than double the industry pattern, helping Dell strengthen its No. 2 market-share position in the region.
“We’re not pleased with 24% growth,” said Michael Dell, noting that the company had headroom for further advances in Europe. In July, Dell replaced its regional management team to address the flagging growth.
