Dell Appears to Turn a Corner

Its fiscal first-quarter results exceeded Wall Street expectations, driving hopes that the turnaround is taking hold

Dell founder and chief executive, Michael Dell Getty Images

by Aaron Ricadela

Dell's vaunted turnaround plan is showing signs of progress. Again. The PC maker surpassed Wall Street's expectations on profit and sales when it reported fiscal first-quarter results on May 29. The results fueled hope that efforts to revive growth at Dell (DELL) are finally taking hold, but the company will need to show further evidence of cost savings and sales growth to ensure the comeback sticks and to reverse a share slump.

Earnings for the quarter ended May 2 rose 3.7%, to $784 million, or 38¢ a share, vs. Wall Street's expectation of 34¢ a share. Sales rose 9%, to $16.08 billion, exceeding analysts' expectations of $15.68 billion. Leading the way were sales of laptops and servers, the computers that run Web sites and corporate networks. Those areas have been a particular focus since company founder Michael Dell reclaimed the reins as CEO early last year. Server shipments rose 21% and laptop shipments jumped 43%.

Dell's turnaround has been a long time in the making. The company suffered nearly two years of declining market share and slower growth through early 2007. Signs of improvement (BusinessWeek, 8/30/07) in the middle of last year were short-lived as rising costs and conservative spending by customers crimped earnings through early 2008. The shares were hit hard after Dell's last report (BusinessWeek, 2/28/08) and have lost 11% of their value this year, compared with a 5.4% decline in the Nasdaq Composite Index.

Giving Dell the Benefit of the Doubt

But for now, investors appear to be giving Dell the benefit of the doubt. Dell shares rallied in extended trading on May 29, adding 2.16, or 9.9%. They had risen 12¢, or 0.55%, to 21.81 in advance of the earnings report. "There's a significant amount of uncertainty for next 6 to 12 months," says Jayson Noland, an analyst at Robert W. Baird, who has a neutral rating on the stock and expects it to reach $22 in the next year. "They're going to get there, but it's still pretty early days."

To get back on track, Dell is attacking the PC industry's fastest-growing segments: consumer sales and emerging markets. Sales in Brazil, Russia, India, and China rose 58% and accounted for nearly 9% of first-quarter revenue; consumer sales rose 20%. At the same time, Dell is slashing costs. "We're doing one so we can do the other," CEO Dell said during a conference call with investors.

Shaw Wu, a senior analyst at American Technology Research, says Dell has been tackling a number of costly endeavors—amping up product design, adding compelling product features, broadening retail sales of its machines, and beefing up international operations. "Those all cost money," says Wu, who has a neutral rating on the stock. "They haven't detailed how much they need to spend. It's not all about cost-cutting."

Duking It Out in the Price-Sensitive Retail Market

Dell expanded beyond its traditional phone and Internet sales and began selling its computers widely through retail outlets last year in a bid to reverse a tailspin that led to the departure of then-CEO Kevin Rollins. Hewlett-Packard (HPQ) surpassed Dell in 2006 as the top PC supplier by gaining share in consumer and small and midsize business markets, which account for about 80% of PC shipments, according to Pacific Crest Securities.