Dell results better than expected, shares jump

SAN FRANCISCO (Reuters) - Dell Inc reported stronger-than-expected quarterly profit on Thursday, showing it was better able to cut costs and protect prices on its products than analysts, or its own executives, had predicted.

Shares of the world's No. 2 personal computer maker rose 7 percent after the earnings announcement, which preceded the close of stock market trade by a few minutes, as investors welcomed signs that its business could be stabilizing.

"The results were strong across the board. You had revenue upside, gross margin upside, and of course earnings upside," said Ashok Kumar, analyst at Collins Stewart.

"They were faced with a fairly difficult demand environment, along with pricing pressure, and it seems the company was able to navigate the those cross currents fairly successfully."

Analysts credited better-than-expected margins for the surprising results, after Dell warned just six weeks ago that higher component costs and a competitive pricing environment, among other factors, would eat into margins.

But Dell reported gross margins of 18.7 percent, thanks to what it called "disciplined" pricing as well as an increase in sales from the first quarter. Wall Street had expected 17.7 percent.

"Obviously it's a better-than-expected performance on the gross margin side," said Richard Kugele, analyst at Needham & Co. "It's encouraging relative to the pre-announcement back in July."

Kugele also pointed to Dell's forecast that revenue for the second half of the year would be stronger than in the first half, if current trends continue.

"They said what they needed to say when it comes to the second half, that it should be higher than the first half," he said. "Slow, steady progress right now is good enough as far as I'm concerned."

For its second quarter ended July 31, Dell reported a net profit of $472 million, or 24 cents a share, down from $616 million, or 31 cents a share, in the year-ago period.

Excluding items, the company posted a profit of 28 cents a share, beating analysts' average estimate of 23 cents a share, according to Reuters Estimates.

Dell, which has been stung by the downturn in enterprise spending more acutely than some other large IT firms, said revenue fell 22 percent to $12.8 billion. Still, that was ahead of Wall Street's estimate of $12.6 billion.

Dell's overall shipments rose 10 percent from the previous quarter. Dell trails HP in global PC shipments and is feeling the pressure from No. 3 Acer Inc, which is growing quickly thanks in part to strong netbook sales.

Dell has been shedding jobs and cutting costs to realign its business, and has been trying to shift its product base to higher-margin offerings and recurring revenue streams through partnerships and a "portfolio" of acquisitions.

For now, Dell remains heavily reliant on computer sales to small, medium and large businesses. Its finance chief cautioned that corporate "budgets are pretty much set" and thus enterprise demand would remain challenging.

But on a conference call with reporters, Chief Financial Officer Brian Gladden said there were "some pockets of improved demand," particularly in the consumer sector.

"Consumer will continue to be pretty good for as we continue to gain share there and I think those markets are improving," he said.

Shares of Round Rock, Texas-based Dell closed up 6.7 percent at $15.65 on Nasdaq.

(Reporting by Gabriel Madway; Additional reporting by Ritsuko Ando in New York; Editing by Richard Chang)