Dell’s Earnings Rise, but Delays Hinder Recovery

SAN FRANCISCO, Aug. 30 - Make no mistake, Dell is in the black. But production delays, particularly problems in getting the vivid paint colors of its new line of notebook computers right, are preventing the struggling company from growing as quickly as investors have hoped.

Dell reported Thursday that lower component prices helped push net income in its second quarter up 46 percent, to 3 million, or 32 cents a share, from 2 million, or 22 cents, in the year-earlier period. Revenue grew 4.8 percent, to .77 billion, from .09 billion.

"The turnaround looks to be on track, but the reality is that the expectations were low," said Shaw Wu, a computer sector analyst with American Technology Research. "They are good, but not great."

Dell managed to beat income and revenue predictions of a consensus of Wall Street analysts, who estimated Dell would report sales of .6 billion and net income of 30 cents a share. But Wall Street analysts said that their projections were modest and that Dell continued to lose market share to competitors like Hewlett-Packard and Acer.

Hewlett-Packard, for instance, said that its PC sales grew 29 percent, to .9 billion, in the three-month period when Dell's PC sales grew 3.5 percent, to .9 billion.

Dell's stock rose 0.5 percent in after-hours trading Thursday after closing at .46. Dell made its announcement after regular trading ended.

The computer maker, based in Round Rock, Tex., has been trying to revive itself under the direction of its founder, Michael S. Dell. Mr. Dell took back the role of chief executive in January after growth at the company flagged.

Responding to the growing demand for laptops, Dell in late June introduced two new lines of notebooks, which come in shades the company calls espresso brown, flamingo pink and midnight blue. It advertised the colorful computers heavily, despite the product delays that hampered timely shipping. Dell has attributed the problem to a shortage of displays and struggles getting ample supplies of paint.

But it is customers who have been feeling blue, and venting angrily on Dell's Web site, saying they are being told that shipping delays might persist weeks or even months.

Analysts said quality issues with the paint, and supply constraints on certain types of displays, have overwhelmed its manufacturing. Clay Sumner, an industry analyst with Friedman, Billings, Ramsey & Company, has told investors that Dell is gaining a reputation among customers for not being able to meet shipment dates. The delays appear to have damped second-quarter sales growth on notebooks. During the second quarter, Dell's sales were .9 billion, a 5 percent rise over the comparable period a year earlier. Bob Pearson, a Dell spokesman, said he was not able to estimate when the production problems would be resolved or how long the delay for the orders would last.

On its Direct2dell.com Web site, where the company takes feedback from customers, patience among some visitors seemed to be wearing thin.

Fay Nehring, a customer, wrote: "I just want to let Dell know how very disappointed and frustrated I am. I really wanted a pink 1520, which I ordered on 7/9/07. The order was delayed twice, then canceled. I reordered in red on 7/31/07 and still am getting delayed and expect to get canceled again any day. This is simply unbelievable!"

There were some bright spots for Dell in the quarter that ended Aug. 3. The company said a decline in the costs of components, like processors and memory, bolstered income. "This decline over the last six months was very steep - the largest decline in five years," Mr. Pearson said. The cost reductions helped Dell's gross margin grow to 19.9 percent, up from 19.5 percent in the first quarter of this year.

Dell had already told analysts that it did not expect the decline to continue indefinitely. Some computer industry analysts said that a stabilization of component prices could diminish one factor that has helped Dell recover. The analysts said that could also lead to increased volatility in the company's gross margins, giving investors mixed signals.

Dell did not hold a conference call with investors to discuss its earnings. The company has not been holding such calls, which once were standard practice, while it has been trying to resolve problems with its accounting practices, which are being investigated by the Securities and Exchange Commission. Dell said its financial results were preliminary, pending the completion of its accounting inquiry.

This month, Dell disclosed that it regularly falsified quarterly financial results from 2003 to 2006 to give the appearance that it had met sales targets. The company said it expected to file a final report of the investigation in November and restate earnings.