Financial

posted on 29 August 2008 04:20

Dell posted a surprise 17 per cent drop in profits for its fiscal second quarter, even though its revenues handily beat Wall Street estimates.

Round Rock said the earnings squeeze was a result of technology spending slowdowns and its expansion into Europe and Asia.

Net income was $616m in the quarter, down 17 per cent from a profit of $746m in the same period last year. Revenue grew 11 per cent to $16.43bn from $14.77bn year-over-year. Analysts were expecting sales of about $15.95bn.

"Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter," said Dell's CFO, Brian Gladden. Gross margins were 17.2 per cent in Q2, down almost 20 per cent from a year ago.

Dell also warned it sees "continued conservatism" for IT spending in the US, which is spreading to Western Europe and Asia.

Revenues increased year-over-year in every segment except desktops, which was essentially flat. Laptops earned Dell $4.87bn, up 26 per cent from last year. Server revenue was up 5 per cent to $1.7bn. Storage grew 11 per cent, earning $681m. Service revenue was up 14 per cent to 1.46bn. Desktop PC revenue was down 2 per cent to $4.93bn.

Dell said it's on course to reduce costs by $3bn annually by fiscal 2011. Dell reduced its headcount by 8,500 people since Q1, not counting the employees who joined from acquisitions. It also consolidated company-owned sites in the US and Canada.

But for the near future, the hardware vendor still expects its bottom line to be hit by the costs of restructuring to improve profitability.

The profit drop seems to have unsettled investors. As of this publication, Dell shares are down nearly 10 per cent in after-hours trading.

^{By Austin Modine,  copyright The Register.}

Additional Notes

Dell pointed to strength in its PowerVault and EqualLogic PS-Series iSCSI lines but did not mention the EMC-sourced AX and CX storage products. PowerVault was up strongly and EqualLogic revenues grew more than 150% year on year. Dell is investing heavily in the storage area.

CEO Michael Dell said, in the earnings call said, that, after the recent Latitude E-Series notebook launch: "We'll be following that up with a complete refresh of our desktop and workstation portfolio."

He added: that there is a "tremendous opportunity as consumers transition to mobile computing, wireless broadband and smaller devices," which is perhaps a hint to the upcoming ultra-mobile PC. 

EMEA Mis-step

The EMEA area saw overly aggressive pricing, ahead of expected cost-improvements and lowering gross margin, which was in part a response to weaker markets in western Europe and also, it is thought, to competitive pressure from HP. Michael Dell said the poor situation there was largely self-inflicted, indicating perhaps internal EMEA Dell management issues.

The conclusion is that Dell priced, we think notebook products - where Gladden said average selling prices were down - low to gain market share in Europe in the quarter, lost profitability as a result, and still saw a relatively low quarterly growth rate.

Consumer

Overall Dell lost $5 million on consumer business revenues of $2.78 billion. It emerged in the call that Dell has an infinitesimal share in the European consumer market. 

In response to a point about share gains but no profitability in the consumer segment, CFO Brian Gladden said: "You'll see improving consumer profitability over the next four quarters." There were seven consumer product launches in the first half of his year with another 17 coming in the second half.

^{[Chris Mellor.]}