Last Updated: May 30, 2008: 12:34 PM EDT
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Dell delivers, no guarantees

Shares surged Friday after the computer maker reported better-than-expected results, but the climate remains tough for PC makers.

By Scott Moritz, writer

NEW YORK (Fortune) -- Dell jumped 8% following strong first-quarter results, but analysts aren't entirely convinced that the PC maker's slowdown avoidance act signals a real turnaround.

Dell (DELL, Fortune 500) shares surged Friday as investors applauded the company's commitment to slashing overhead and its ability to sidestep a soft U.S. economy. But the aggressive price cutting that helped juice sales isn't exactly the kind of foundation a rehab project is built on, say some analysts.

The company says the better-than-expected first-quarter results, announced after the bell Thursday, show the turnaround plan is starting to pay off, most notably in its ability to stop losing market share in its core PC and server segments. Dell also benefited from strong overseas sales, where - for the first time - more than half of its revenue was booked.

The Round Rock, Texas-based PC maker beat Wall Street's expectations for the quarter ended earlier this month, saying cost-cutting gains boosted the company's closely watched operating profit margin. Dell made $784 million, or 38 cents a share, up from the year-ago $756 million, or 34 cents a share. Revenue rose 9% from a year ago to $16.08 billion. Analysts surveyed by Thomson Financial were looking for a 34-cent profit on sales of $15.7 billion.

In a research note Friday, Merrill Lynch analyst Jeff Fidacaro upgraded Dell to a buy, calling the company's first-quarter performance an "inflection point." "Dell is beginning to see revenue growth reignite owing to its growth initiatives and expansion into the retail and indirect channel, which was reflected in market share gains in first quarter," Fidacaro wrote.

The company said Thursday it eliminated about 3,700 jobs in the past quarter. Analysts were expecting 2,200 job eliminations out of the company's 82,700-strong workforce. Dell also plans to move more manufacturing offshore as part of the expense reduction effort. On a conference call late Thursday with analysts, Dell said it saw continued opportunities to reduce costs.

Turnaround watchers say Dell's improvements are starting to show, however it may be too early to tell if the former PC leader can surmount all the challenges ahead.

And while cost cutting and low component prices helped prop up Dell's performance last quarter, some analysts see more difficult times ahead for the PC maker. The PC price war continues against rivals like Hewlett-Packard (HPQ, Fortune 500), Toshiba and Lenovo, and the pressure is made worse by Apple's (AAPL, Fortune 500) expanding presence in the market, particularly in the fast-growth notebook segment.

Cross Research analysts slapped Dell with a downgrade to sell Friday. The analysts say the benefits of lower costs are not sustainable. And once these benefits recede, the company's aggressive pricing, which fueled the overseas growth and overall market share gains, will erode margins and profits.

Dell's progress in fighting those trends was evident in its first quarter operating margin, a gauge of how well the company is balancing expenses with falling PC prices. Most analysts were looking for operating margins in the 5.1% to 5.4% range. But the number came in at 5.6%, showing Dell isn't getting beaten up by lower prices.

There's still a lot of work to go and a lot of risk as Dell tries to completely overhaul its manufacturing model and its retail strategy, Cowen analysts wrote in a research note. But declining expenses and rising sales should give Dell some earnings growth, if the plan succeeds, says Cowen, which kept its neutral rating on Dell. To top of page