Dell Computer
Profit Doubled
In Its 3rd Period
By Robert Tomsho
11/20/1992
The Wall Street Journal
PAGE B7
(Copyright (c) 1992, Dow Jones & Co., Inc.)
Dell Computer Corp., continuing to avoid the effects of a grueling computerprice war, posted sharply higher sales and net income in the fiscal third quarter ended Nov. 1.
The Austin, Texas, personal-computer maker said it made broad advances in all its markets. As a result, both profit and sales more than doubled from a year earlier. Despite industrywide erosion in profit margins, net soared to $28.6 million, or 72 cents a share, from $13 million, or 35 cents a share; sales jumped to $570 million from $229.3 million.
That performance exceeded the expectations of industry analysts, who generally had projected sales of as much as $540 million and per-share earnings as high as 65 cents. On Wall Street, Dell's stock surged $2.125 a share, to $38.375, in heavy national over-the-counter trading.
Much of Dell's success, analysts said, came at the expense of low-priced computer makers, such as Everex Systems Inc. and Zeos International Ltd., which have seen their sales dwindle as bigger rivals such as Dell, Compaq Computer Corp. and International Business Machines Corp. slashed prices and introduced new lines of low-cost machines.
"They are knocking off these low-end guys and the low-end guys no longer have room to maneuver," said Eugene Glazer, an analyst with Dean Witter Reynolds. "Everybody is basically going back to these brand-name companies."
But Dell also continued to hurt its toptier competitors as well. IBM, for example, posted a $2.78 billion third-quarter loss, amid plummeting European sales. In contrast, Dell's international sales nearly tripled during its fiscal second quarter, as did sales to large corporate, government and educational accounts, reaching $286 million. "We are still gaining market share from what has traditionally been IBM territory," said Michael Dell, chairman and chief executive officer.
Moreover, after seeing its net profit margin slip to about 4.8% in the fiscal second quarter as it cut its own prices, Dell bounced back to 5% in the third, within the company's usual margin level of 5% to 6%. Mr. Dell said the company has been able to largely maintain its profit margins because of its direct-sales strategy. "Our incremental costs to add an additional sales person in Austin are far lower" than what it costs competitors to set up regional sales offices, said Mr. Dell.
Mr. Dell said Dell was off to a "strong start" in its fiscal fourth quarter.
With consumer demand high, analysts say they don't expect another steep, broadbased round of price cutting, but some question whether Dell can maintain its growth rate if and when Compaq finally sorts out the production problems it has had with its popular new ProLinea line of low-cost PCs and when IBM's new line of low-cost machines, PS/ValuePoint, gathers marketing momentum. "The key is, what impact is IBM's re-entry going to have?" said Andrew Neff, an analyst with Bear Stearns & Co. "It's still not clear."