Dell Beats Forecasts, Then Surges

August 28, 2009
Dell Beats Forecasts, Then Surges
By DAN ZEHR

For years, Dell feasted on a banquet of corporate technology spending,
as large companies spent millions of dollars every three years or so to
update their fleets of personal computers. However, ever since the
recession began more than a year ago, the computer maker has had to
fight for every morsel as companies hoarded their technology dollars.

Now, Dell’s involuntary diet looks as if it might be coming to an end.

On Thursday, after Dell reported unexpectedly strong second-quarter
earnings, executives said that its commercial business should pick up
again in 2010, starting in the United States.

The advent of new technologies from Intel and Microsoft, including
October’s release of the Windows 7 operating system, and the cost of
maintaining older machines will spur companies to replace their aging PC
fleets, said Brian T. Gladden, Dell’s chief financial officer. “We’ve
seen the whole entire installed base is basically 12 to 15 months older
than it usually is,” he said.

A new refresh cycle could prove vital for the recovery efforts at Dell,
which despite its recent struggles remains a top contender in the market
for commercial desktop and notebook sales. The company, based in Round
Rock, Tex., generates more than 80 percent of its revenue from
commercial customers, and it continues to lean heavily on sales of PCs
even as it expands its higher-end products and services.

On a conference call with investors to discuss the quarterly financial
results, Michael S. Dell, the chief executive, said the company already
had won bids to upgrade several large computer fleets. While many
deployments have been delayed because of tight budgets, he said, “we’re
convinced they’ll occur.”

Dell reported net income of $472 million, or 24 cents a share, for the
quarter ended July 31. That was a 23 percent decline from the $616
million in net income, or 31 cents a share, reported in the period last
year. Excluding costs associated with its continuing revamping, the
company reported earnings of 28 cents a share, substantially exceeding
the forecast of 23 cents a share from analysts polled by Thomson Reuters.

Dell’s revenue declined 22 percent, to $12.8 billion, from $16.4 billion
a year ago. Analysts had expected revenue of $12.6 billion, according to
Thomson Reuters.

Looking ahead, Mr. Dell said he expected revenue in the second half of
the fiscal year to be stronger than in the first half.

The better-than-expected performance caused Dell’s stock price to surge
nearly 7 percent, to $15.65, in the final minutes of trading Thursday.
The shares had been roughly flat, but about 15 minutes before the 4 p.m.
market close, they started rising sharply on heavy volume. About three
minutes before the market closed, the company put out its full earnings
news release, which had been scheduled to come out after the close of
trading.

Jess Blackburn, a Dell spokesman, said the company accidentally posted
some material from its quarterly financial presentation too early. “It
was an inadvertent error on our part,” he wrote in an e-mail message.
“Consistent with full disclosure, we immediately posted our news release
as soon as we recognized what had happened.”

The brightest spot for the quarter came from Dell’s public group, which
includes government, school and health care customers. Buoyed in part by
customers’ use of federal stimulus funds and strong sales to educational
institutions, revenue for that group rose to $3.8 billion, a 20 percent
increase over the previous quarter.

David Bailey, an analyst at Goldman Sachs, said he was pleased to see
that Dell’s gross profit margin actually rose slightly in the quarter.
He said that the company appeared to be selling a more profitable mix of
products. “That puts them in a better position in the near term,” he said.

Dell’s efforts to improve its cost base should also put it in a good
position to defend and perhaps expand its commercial market share, he
said. The company has spent the last two years revamping its operations
to gain a better competitive footing.

Its ability to recapture or expand its share of large PC contracts will
be a critical test of its reorganization efforts.

Meanwhile, rivals have upped the ante. In particular, Hewlett-Packard
has gained significant momentum in the last two years. The company,
based in Palo Alto, Calif., now ships more PCs worldwide than any other
computer maker. It accounted for 19.8 percent of worldwide PC shipments
in the second quarter, according to IDC, a research firm. Dell, once the
market leader, was a distant second with 13.7 percent.

Throughout 2008, Dell retained its lead in market share for shipments to
commercial customers, according to IDC. But during the second quarter,
H.P. passed Dell in that segment, too, IDC said.

“H.P. has a much higher proportion of its business in the consumer
market, so it gets a proportionally better lift when consumers are
buying and corporations aren’t,” said Roger L. Kay, president of
Endpoint Technologies Associates. “If corporations are buying, Dell gets
a bigger swing than H.P.”

A positive swing from corporate technology spending cannot come soon
enough for Dell. Its commercial businesses showed some early signs of
recovery in the company’s most recent quarter, but revenue and profit
fell far short of last year.

H.P.’s momentum could help sway a handful of corporate technology
buyers, said Matthew Eastwood, vice president of enterprise platform
research at IDC, but large companies do not change PC vendors on a whim.
Companies typically want to maintain some consistency with vendors and
supplies, he said, and being clued in on a computer maker’s road map for
future products helps technology managers plan for what’s next.

“Up until now, a lot of the end users and actual customers have been
very quiet, sitting back and more or less trying to manage their
infrastructure by looking in the rearview mirror,” Mr. Eastwood said.
“Now they’re starting to shift and focus toward the future again: ‘What
kind of investments am I going to make in I.T. to fuel my next business
cycle?’ ”

Computer makers need to have an answer for that question now, or they
risk the loss of new hardware sales and sales of the more profitable
services and products that go along with the computer. Sales of
technology-management services like online monitoring of PC fleets have
become increasingly important for computer makers as profit margins on
hardware narrow.

Dell has pushed hard into these services through acquisitions,
partnerships and internal development work, but its list of services
still lags the size and scope of H.P., especially after H.P.’s
acquisition of Electronic Data Systems last year.

“If you’ve got better services than your competitor, then you can drag
your hardware in on the one-stop shopping idea,” Mr. Kay said. “H.P. is
better positioned with its services and software acquisitions.”

Copyright 2009 The New York Times Company