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Dell's Results Gets a Mixed Vote From Analysts

Dell's earnings were closely watched in many quarters because it suffered the most in 2009 among PC vendors. HP, with a more diversified business model and bigger consumer play, wasn't hurt as badly, and Acer, with its focus on the stronger consumer segment, surpassed Dell (NASDAQ: DELL) as the number two PC vendor in the world.

Dell reported net income of $334 million, or $0.17 cents per share, a slight dip from the $351 million, or $0.18 cents per share it reported a year ago. EPS on a non-GAAP basis, which excludes one-time charges related to the acquisition of Perot Systems, was $0.28.

Sales rose 11 percent year-over-year to $14.9 billion, with some business units doing better than others. Dell's commercial business sales to large businesses and corporations rose 11 percent, while SMB rose 13 percent and consumer rose 25 percent.

Wall Street, however, was not impressed with the numbers or CEO Michael Dell's optimism. The stock fell $0.96 today, or 6.65 percent, to close at $13.46.

Still, Broadpoint AmTech hardware analyst Dinesh Moorjani reiterated his buy rating on Dell and set a target price of $19.

"We continue to view Dell as a great way to get exposure to a 2010 PC/server upgrade cycle given that commercial represents 76 percent of revenue, and as 66 percent of Dell's revenue comes from PC and server hardware. Dell is also making progress toward improving its product mix and should see its PC market share stabilize/improve with a corporate PC upgrade cycle. An upgrade cycle should also drive operating leverage in the model," he wrote in a research note issued Friday morning.

UBS analyst Maynard Um was a little more guarded. "Although the magnitude of the revenue beat surprised us, gross margin degradation was equally surprising (17.4 percent vs. UBSe: 18.3 percent) & we were less surprised with opex increases given our prior analysis. We expect consensus EPS revisions closer to our FY11 EPS estimate of $1.18 (unchanged) & believe the qtr is likely to test investor conviction on the potential leverage Dell may see into an enterprise refresh," he wrote in a research note.

Analysts took notice of Dell's margin problems with consumer products. "Despite efforts to reduce its cost of goods sold (COGs), the company's profitability eroded in the quarter due to its retail commitments. Dell was caught between set-price commitments to retailers and rising component costs. Those costs lead to margin erosion, which dented Dell’s profitability in 4Q09," noted John Spooner, practice manager with Technology Business Research

However, Broadpoint's Moorjani is not quite as concerned. "Margin weakness is a short-term headwind and not a structural issue: We believe the gross margin pressure is due to short-term factors, and does not reflect a structural issue with Dell's business model," he wrote.

He noted that there was no margin pressure on the commercial business units, where there is more of Dell's overall business and has a higher margin to start.

Looking forward to growth in services

Attention now turns to the future and how Dell plans to drive new business with its growing services arm. On the earnings call, CFO Brian Gladden said that the company was getting more and new types of business thanks to being perceived as having a "solutions offering" instead of just a product offering.

TBR's Spooner is on board with that notion. "TBR expects Dell to make several additional small to medium-sized acquisitions over the next several quarters, following a pattern that's similar to that of KACE. We believe Dell will target companies whose products and services can add to its solutions portfolio, therefore delivering new opportunities," he wrote.

Broadpoint's Moorjani adds "The Perot acquisition strengthens the enterprise offering, shifts Dell's product mix to higher-margin areas, and provides a source of recurring revenue and greater stability to the model. Dell is also starting to see revenue synergies from the merger."

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.