Dell's growth engine keeps humming

Pumped up by continued strong sales of PCs and servers in its enterprise business, Dell Computer Corp. beat even high-end Wall Street expectations in its third fiscal quarter Monday.

The Round Rock, Texas, company posted a profit of $248 million, or 69 cents per share, on record revenues of $3.2 billion.

First Call consensus expected the PC maker to return a profit of 65 cents per share.

The $3.2 billion in sales represents a 58 percent increase from the year-earlier quarter, and the $248 million profit is 71 percent higher than a year ago.

"We continued to execute well in all key areas of our business, achieving a record return on invested capital of 178 percent," said CEO Michael Dell in a statement. "We believe this is the highest return on invested capital in our industry."

On a unit-shipment basis, Dell continued to grow at more than three times the industry rate during the quarter, moving it into the No. 2 market position in the U.S. for the first time, according to Dataquest Inc.

"Very positive numbers, numbers that really don't surprise me too much," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "We heard the whisper number might be as high as 67 or 68 cents, so this is very impressive. It's a tribute to their direct marketing and sales plan."

But the upside surprise in earnings wasn't enough to salvage the firm's stock as it sank $3.63 per share to $79.75, although the results were released following the close of the market. The stock continued to drop in after-hours trading, slipping another $1.13 per share following the announcement.

"It's the beginning of the end of seven years of bull market for the technology group," said Barton Biggs, an analyst at Morgan Stanley Dean Witter. "I think stocks like Dell, Compaq, and some of the other big gainers in the past will continue to underperform -- not for months, but for years to come."

Dell's highly successful direct sales and marketing program is responsible for sales of more than $3 million per day through its Internet site, an annual run rate of $1 billion. This formula, copied by many major PC makers, has been especially effective in closing sales with fellow technology firms.

"This tactic works well when selling to technology companies that understand the Internet and feel comfortable ordering the machines they need without making eye contact with a salesperson," Mazzucchelli said. "That's why their sales continue to grow faster than their competitors'."

Indeed, Dell's third-quarter results represent the firm's 15th consecutive quarter of increasing revenues.

"Our strong results continue to differentiate us from competitors, several of which are attempting to imitate aspects of Dell's unique direct business model," Dell said. "We believe that our customers around the world recognize the Dell difference and increasingly appreciate the benefits, stability, and strength of our direct model."

Dell generated $395 million in cash from operations and ended the quarter with $1.6 billion in cash and marketable securities. This is up $100 million despite the fact that the company spent approximately $300 million to repurchase an additional 9 million shares of company stock.