Computers August 27, 2009, 9:35PM EST

Dell's Profits Dive, Stock Climbs

Sluggish desktop and laptop sales continue to drag on Dell's profits, but improved margins and increased server and storage sales give investors hope

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Dell continues to struggle with sluggish corporate technology spending and a U.S.-centric business that's exposing it to the heart of the global recession. But it reported better-than-expected fiscal second-quarter earnings Aug. 27 as the company made headway into profitable server and storage markets, even as the PC business suffers from bruising price competition.

Investors bid up Dell (DELL) shares after the computer maker reported stronger profit margins, and a mistaken early release of the results led to a wave of buying by Dell investors.

Dell's profits fell 23% and sales declined 22% for its fiscal second quarter ended July 31. Sales of desktop PCs and laptops—Dell's mainstay businesses—fell 33% and 21%, respectively. But revenues from corporate server computers and disk storage machines increased 7%. The prices of consumer and business PCs are falling rapidly, vexing computer makers that have relied on the machines for hefty chunks of their sales.

The results are "about as good as you can expect given the economic backdrop," says Ashok Kumar, analyst with Collins Stewart. "Enterprise improvement is going to be a 2010 story, and consumer sales are stabilizing."

Fewer Discounts, Tighter Budgets

Dell's gross profit margins in the second quarter increased by 1.5% to 18.7% of revenues as the company eschewed especially steep discounts and kept costs in check. Chief Executive Michael Dell said in a statement the company anticipates stronger revenues in the second half of 2009 than it reaped in the first. Wall Street analysts said large companies would increase technology spending next year as well.

There are harbingers of better computer sales on the horizon. Microsoft (MSFT) is scheduled to release its anticipated Windows 7 operating system in October, and the software could spur a spate of PC buying. In a conference call with reporters, Dell Chief Financial Officer Brian Gladden said he expects improvements in sales to consumers in the second half of the year and to corporate customers in 2010. "We're pleased with our financial performance," he said.

Dell is also holding the line on spending and has cut manufacturing costs aggressively. About 70% of Dell's product line now falls under a program to manufacture products less expensively, according to Gladden. Dell's operating costs declined 14% during the quarter, to $1.72 billion.

Mistaken Early Release

Investors were heartened by the results. Dell earned 24¢ per share, beating analysts' consensus estimates by a penny, and shares of Dell rose nearly 3% in extended trading Aug. 27. Shares of Dell had closed up 98¢, or 6.7%, at 15.65 after the stock got a boost from an accidental early release of the earnings report by Dell.

The shares had traded at about 14.60 to 14.70 for most of the day but spiked in price during the final minutes of trading after the second-quarter results were posted to Dell's Web site before the close of the market. Dell's trading volume surged in the last 20 minutes of the session. Asked about the mishap during the conference call, Gladden said the release had been posted early on Dell's Web site by mistake, and that once the error was detected the official press release was issued to wire services immediately.