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Dell quarterly profit tops estimates

/ Source: Reuters

Dell Inc. posted a higher-than-expected quarterly profit on Thursday, driven by cost cuts and strong demand from consumers and foreign markets, and its shares jumped nearly 10 percent.

The world's second-largest personal computer maker pointed to the strong performance as evidence that a year-long turnaround led by founder Michael Dell, who returned to the chief executive post in January 2007, was yielding results.

Dell's unit shipment growth of 22 percent was the strongest in two years, though it said U.S. corporate customers were keeping a tight grip on spending, a trend it expects to last through the summer.

Net income in the three months ended May 2 rose to $784 million, or 38 cents per share, from $759 million, or 33 cents per share, a year earlier. Revenue was $16 billion, up 9 percent from a year earlier.

Analysts had expected a profit of 34 cents per share, excluding special items, on revenue of $15.7 billion in its fiscal first quarter, according to averages of Wall Street expectations on Reuters Estimates.

"Michael Dell had a very slow start (to the turnaround). One quarter doesn't a trend make, but I'm willing to sit back and wait because it looks like he has gotten some traction, especially on the costs," said Kim Caughey, senior analyst with Fort Pitt Capital Group.

Operating expenses were 12.9 percent of revenue, down a percentage point from the previous quarter, Chief Financial Officer Don Carty said.

A share buyback program has also reduced the overall share count by 10 percent over the past year, the bulk of that coming in the first quarter when it spent $1 billion for that purpose. Dell said it plans to spend at least another $1 billion to buy back shares in its second quarter.

"Dell's cost-cutting is starting to benefit margins," said Shannon Cross of Cross Research. "Now the company needs to show that they can maintain and gain market share beyond just benefiting from channel fill of their retail partners."

The Round Rock, Texas-based company cut 3,700 jobs in the quarter, bringing total reductions to about 7,000 over the past year and closing on its target of eliminating 8,900 positions.

Dell, which rose to prominence by pioneering direct sales of personal computers, has made a big push to sell more through stores. Notebook unit sales surged 43 percent, while consumer PC units grew at more than two times the industry rate.

International topped domestic revenue for the first time, led by Brazil, Russia, India and China with 58 percent revenue growth. Asia-Pacific and Japan revenue rose 19 percent, while in Europe, the Middle East and Africa it grew 15 percent.

Carty said Dell expected to keep growing faster than the industry.

"We had unit share gains worldwide in virtually every product category and in every major region," Carty said on a conference call with reporters. "The results of this quarter are evidence that that strategy to reignite growth was the right one."

But Carty noted U.S. corporate customers were still buying cautiously given the uncertain economic outlook.

"People are holding back from spending," he said. "While we see hesitancy around workstation investments ... the appetite for servers and storage continues to be very considerable."

Dell's Americas revenue rose 1 percent, though server unit shipments soared 20 percent, four times that of the industry.

"That really is the company's sweet spot," Caughey said of servers. "It's good to see Dell there instead of chasing things like TVs and consumer appliances. This bodes well for Dell."

Carty said computer memory prices, which have fallen sharply in the past year and helped contain Dell's input costs, were close to hitting bottom.

"Memory, for last couple quarters, sold to very close to the variable cost of production, so you know those prices don't get a whole lot lower. We certainly will not see the steep declines of a year ago," Carty said.

Dell shares have risen nearly 10 percent in the past three months, compared with a fall of about 2 percent for rival Hewlett-Packard Co. and slightly trailing an 11 percent rise in the Nasdaq. Dell shares were trading at 18.7 times expected 2009 earnings, a premium to HP's 14.9 multiple.