5:06 PM
By Gabriel Madway
SAN FRANCISCO | Thu Nov 18, 2010 7:09pm EST
SAN FRANCISCO (Reuters) - Dell Inc raised its yearly income forecast after third-quarter margins and earnings smashed expectations, helped by sliding costs of PC components and propelling its shares 4.8 percent higher.
The personal computer maker, which vies with Acer Inc for the No. 2 spot in the global PC market, expects stable demand from government and corporate customers and favorable component prices this current quarter.
Analysts pointed to a big beat on Dell's closely watched gross margin number: 20 percent in the third quarter on a non-GAAP basis versus expectations of 17.5 percent.
"Gross margins jumps out at you from what we've seen so far. That's a level we haven't seen for a long time from this firm," said Morningstar analyst Michael Holt.
Analysts said Dell still had to prove to investors its improvement could be sustained. The company did caution that margins would be "tempered" on a mix shift toward the consumer business during the holiday quarter.
"Leverage in the model is going to be key as people gauge the sustainability of what was a very strong gross margin number," said Stifel Nicolaus analyst Aaron Rakers.
Dell, which benefited from falling prices for components such as hard drives and screens, also credited its discipline on pricing war for shoring up margins.
As corporations continue to upgrade aging hardware, sales in Dell's large enterprise business rose 27 percent amid good demand for desktop PCs, servers and networking.
"We see stable and good commercial demand for the business, and the component environment, we expect that to continue, and as a result, we think we should have a pretty solid fourth quarter," CFO Brian Gladden told Reuters in a phone interview.
Gladden also waved off fears that government budget cuts would eat into its business. Dell exposure to weakening government spending was a major question mark following a warning by Cisco Systems last week about weak public-sector spending.
The share price rally following the earnings report reversed a 6 percent loss in Dell's shares since Cisco's warning last Wednesday. Dell's shares were halted after-hours before rising 4.8 percent to $14.32 from their close of $13.67 on Nasdaq.
IN TURNAROUND
Dell's turnaround effort has proceeded in fits and starts over the past few years, frustrating investors. The company has used M&A to try to diversify its portfolio, but it remains heavily reliant on sales of low margin PCs, which still make up half of its sales.
"I believe the third-quarter results are beginning to demonstrate that the strategy we have described to you over the past year is the correct one," Chief Executive Michael Dell on a conference call with analysts.
The company's top line has benefited from the corporate refresh cycle, but Dell has been challenged to translate sales growth into improved profitability.
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