Dell Shares Slip Despite Higher Net on Slowing Sale Fears

Shares of Dell, the No. 3 global PC brand, fell 2 percent in pre-market trading on fears of a sales slowdown despite reporting better-than-expected third-quarter earnings.

Dell was at $15.29, down 34 cents, before the opening bell.

On Tuesday, the company reported third-quarter net income rose 9 percent, or 49 cents a share, ahead of estimates largely due to stronger sales to enterprise clients.

The enterprise business is growing nicely, founder and Chairman Michael S. Dell told investors Tuesday night. Still, he and CFO Brian Gladden said the company could not predict the impact of recent Thai floods on critical components and warned fourth-quarter sales might be flat.

The report further illustrates how the company has moved upscale from a consumer PC vendor into a total provider of computers and services for business.

Dell said third-quarter net was $893 million, compared with $822 million a year ago, while revenue was flat at $15.4 billion. The flat line worried some analysts.

Dell shares fell about 1.5 percent after hours from their close at $15.63, up 4 percent in the past three months and 15.4 percent this year.

Analysts had expected the Round Rock, Tex.-based direct-order PC pioneer to report earnings of 47 cents a share on revenue around $15.65 billion, compared with 2010's earnings of 45 cents on revenue of $15.4 billion, FactSet Research said.

Although the pace of PC shipments is easing compared to the sizzling arc for smartphones and tablets, there had been signs Dell's results may beat the estimates.

One is that its printers partner, Lexmark International, previously reported third-quarter results that exceeded estimates. CEO Paul Rooke told IBTimes the relationship between Lexmark and Dell was outstanding.

After it abandoned its own try to beat No. 1 PC maker Hewlett-Packard in printers, where it's also No. 1, Dell and Lexmark have focused heavily on enterprise sales.

During the third quarter, PC and server buyers may have hesitated while HP mulled the future of its PC business and switched to Dell. Only last month, just before closing its own fourth quarter, did new HP CEO Meg Whitman announce the PC business would be kept.

As well, several bellwether technology companies, such as IBM, Cisco Systems and Nvidia have also beaten estimates, which boded well for Dell.

Analysts generally expected a favorable report, watching for profitable outcomes including a boost in gross margins from last quarter's 23.3 percent, cash flow and outlook for the fourth quarter, traditionally Dell's busiest.

In fact, third-quarter gross margins fell to 22.3 percent.

Peter Misek, analyst with Jefferies, said he believes the corporate cycle to upgrade PCs is slowing along. As well, managers might want to defer orders until Dell partner Microsoft delivers Windows OS 8 next year.

Misek said he believes Dell will benefit from lower component prices. He warned it might be hard for the company to boost revenue significantly.

But Misek and other analysts, like Mark Moskowitz, with JPMorgan Chase, think Dell's focus on services adds earnings potential.

Dell acquired Perot Systems for $3.9 billion in 2009, to move more into the computer services business. Founded by Electronic Data Systems founder H. Ross Perot, the two-time presidential candidate, the former Perot unit competes against EDS, now a part of HP, as well as with IBM in the enterprise services sector.

Finally, another barometer will be Dell's cash and investments, which were $16.18 billion last quarter. They were $16 billion in the third quarter.

Besides repurchasing $600 million worth of shares, Dell makes acquisitions, having just completed the purchase of Force10 Networks for a reported $700 million, which bolstered its products in the data center and switching sector against Cisco and HP.

Dell said It's not thinking of paying dividends.

While its own tablet, the Dell Streak, has not been a hit in the market, investment bankers for months have suggested Dell might acquire Research in Motion, the BlackBerry and BlackBerry PlayBook developer, to get more into the market for portable devices and tablets.

Acquiring RIM, though, might be a monumental battle and put Dell into a different sector from the one it knows best.

RIM, based in Waterloo, Ontario, has already watched as activist investors including Toronto's Victor Alboini and New York's Leon Cooperman have bought into the company. RIM's market capitalization is now $9.6 billion and its enterprise value is $8.48 billion.

Meanwhile, Dell's market capitalization is now $28.5 billion. Its enterprise value is $20.6 billion.