November 15, 2006 5:05 PM PST

Dell delays earnings results; HP on for Thursday

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Dell has gotten into trouble over the last several quarters by capturing too much market share at the low, unprofitable end of the market, which CEO Kevin Rollins has blamed several times for the company's woes. But Dell also no longer has the pronounced cost advantage over its rivals that it enjoyed for many years. HP and other companies have learned from Dell's example. A shift in PC shipments to notebooks has meant that, because of an in-house manufacturing policy, Dell actually spends more per unit than it would if it followed the lead of the industry, which purchases notebooks completely assembled.

It's also unclear if the huge battery recall initiated by Dell had an impact on the company's fortunes during the quarter. Just about every other PC manufacturer--with the notable exception of HP--followed Dell's lead in recalling batteries made by Sony, but Dell was the first company to recall batteries and also collected the largest number. It's unclear whether PC buyers punished Dell for its high-profile recall, but industry participation rates seem low. Lenovo said it was seeing very weak demand for its recall program, but Dell executives declined to comment last week on the response to its recall.

However, there are signs of life at Dell. The company's beleaguered server business has received a boost from Intel's Xeon 5100 processor, which eroded Advanced Micro Devices' long-held performance advantage. Given that servers are much more profitable than desktop PCs--Dell's main product--it's likely the company will have seen an improvement in earnings during the quarter, Toni Sacconaghi, an analyst with Sanford Bernstein, wrote in a research note.

Dell will also see better margins from its decision to adopt AMD's processors, according to Sacconaghi. After years of fidelity to Intel, Dell finally listened to its customers this year and began offering products using chips from both Intel and AMD. The company's first AMD products are just getting into the market, but going forward Dell will be able to force Intel and AMD to compete for its business, much like HP has done.

HP's dual-processor strategy and a focus on profitability under Hurd have kept its operations running smoothly all year. The benefits from Hurd's massive cost-cutting over the past year are starting to pay off and HP is also making inroads into Dell's enterprise business, Merrill Lynch's Farmer said.

HP likely enjoyed an excellent quarter in the PC business, said Samir Bhavnani, an analyst with Current Analysis. The company was the top player in the U.S. retail market, which doesn't include Dell's totals. The retail market grew 24.4 percent during the back-to-school shopping season compared with last year, and notebook shipments were up 46.5 percent.

The average selling price of a PC tends to fall during consumer-heavy quarters as PC companies fight for business, but HP and other vendors keep their profits up by persuading consumers to purchase bundles of gear, such as printers or digital cameras, Bhavnani said.

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