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Dell Comes Back with a Vengeance


After rough patch, PC maker back on top.

"Dell Hell" hasn't quite become "Dell Heaven," but the computer maker's turnaround is striking.

Three years ago, the company missed earnings estimates, quality plunged, customer service took a pounding. Once-mighty Dell (DELL) was clearly in trouble.

No more.

Gartner Research says Dell now grabs 31.9% of the U.S. computer market, followed by Hewlett-Packard (HPQ) with 25.3%. Apple's (AAPL) market share increased to 8.5% in the second quarter, up from 6.4% in 2007. Acer, a Taiwanese company, now claims 8.1% of the American market, down from 10.6% last year, suggesting that its acquisition of Gateway didn't cause any immediate miracles. Apple and Acer don't exactly compete for the same buyers.

Worldwide, Hewlett-Packard is the sales leader with 18.1% of the market, followed by Dell at 15.6%. Rounding out the top 5 in global sales, Acer has 9.4% of the worldwide market, followed by Lenovo at 7.8% and Toshiba at 4.4%.

The US personal computer market grew about 4.2% in the second quarter of 2008, despite a generally sour economy. Gartner says much of the growth can be attributed to sharp discounts and may suggest slower future earnings growth in the sector.

But Dell reported robust expansion. In the first quarter, revenue totaled $16 billion, a 9% increase over the same period last year, and earnings were $0.38 per share, a 12% increase. Dell attributed its strong showing to better-than-industry growth of commercial and consumer products and services, as well as reduced operating expenses.

The strong quarter played out against a $106 million charge, or $0.04 per share, for plant closures and severance costs. In the last year, Dell has cut 7,000 employees - about 3,700 in the first quarter alone. However, the company added about 2,700 workers through acquisitions, making the net reduction about 5%.

Like its competitors, Dell is scrambling to stay ahead of the shift to notebook computers from desktops. The company introduced 10 new laptop models pitched to business users this week in San Francisco.

Dell goes toe-to-toe with Hewlett-Packard and Apple in this sector and hopes to increase market share by offering stylish laptops, including models that come in red, blue, "quartz pink" and mica-brushed metal. Dell, a pioneer in the direct marketing of PCs, hopes the snazzy-looking equipment will catch the eye of shoppers at Best Buy (BBY), a retail outlet the company has pitched for about a year.

Dell's new laptops include 7 new Latitude models pegged for general business users and 3 new Precision models intended for engineers, graphic designers and others who require lots of power. The company also offers 2 budget laptops that sell for less than $1,000.

For gizmo gurus, the most appealing new models are likely to be a pair of thin, lightweight models intended to compete with Apple's and Sony's (SNE) sleek laptops. Dell says the new E4200 weights 2.2 pounds, compared with 3 pounds for Apple's MacBook Air. Dell said the light laptops should be available in a few weeks.

Founder Michael Dell returned to the company in February 2007 after a 2-and-a-half year absence. Talk about charisma -- or at least a willingness to make personnel changes and shift strategy – and do both quickly.

In 2005, the company took a $300 million charge to cover costs to repair or replace 2 OptiPlex desktop models. A faulty capacitor caused the PCs to malfunction and shut down without warning.

As long as Michael Dell is running the show, those days are gone.
No positions in stocks mentioned.
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