--Dell's earnings decline for third straight quarter
--CFO sees personal-computer sales pressured until Microsoft's
Windows 8 gains traction
--Dell is working to bulk up software, service offerings
(Adds details on Windows transition, Dell's strategy, fresh
stock quote, in the second, fourth, fifth and eighth through 13th
paragraphs.)
By Drew FitzGerald
Dell Inc. (DELL) shares slumped after its dismal view of
personal-computer demand heightened investors' fears that the
company's profitable software and networking business won't grow
fast enough to deliver a turnaround.
The Round Rock, Texas, company Tuesday reported an 18% drop in
profit during its fiscal second quarter as revenue fell 7.5% on a
steep decline in sales of desktop and notebook computers. Dell has
posted three straight quarters of profit declines as the global
personal-computer market faces growing pressure from tablet
computers, intense price competition and economic uncertainty in
emerging markets such as China.
The company, which also predicted its revenue would continue to
decline in the current quarter, slashed its full-year earnings
forecast to "at least" $1.70 a share, a steep drop from earlier
guidance, which projected the bottom line exceeding last year's
profit of $2.13 a share.
Shares were off 7.3% at $11.45 Wednesday after the size of
Dell's guidance cut caught observers off guard. The stock has lost
one-third of its value since hitting a three-year peak in
February.
Dell's disappointing PC sales weighed on other computer stocks,
including U.S. rival Hewlett-Packard Co. (HPQ), which is slated to
report its own quarterly results Wednesday afternoon. H-P recently
traded 2.4% lower at $19.45.
Analysts had predicted Dell would need to bring its
more-optimistic yearly forecast in line with the market's downbeat
expectations this summer, though the size of the revision came as a
surprise to many.
"The revenue deterioration we saw in the quarter was clearly
above anything we expected," Dell Chief Financial Officer Brian
Gladden told analysts during the company's Tuesday conference call,
adding that Dell's core business of selling PCs will face
challenges for the rest of the fiscal year until wider adoption of
Microsoft Corp.'s (MSFT) Windows 8 software operating system,
slated for release in October, helps to stabilize computer
sales.
About half of Dell's commercial PC users have yet to upgrade to
Windows 7, Mr. Gladden added, and business customers, who account
for most of Dell's PC sales, tend to lag consumer action even
more.
"That's got to continue and will continue as we play out over
the next several quarters here before anybody really thinks about
Windows 8 on the commercial side," he said.
Dell's turnaround efforts have prioritized high-margin
businesses, such as servers, data storage and
information-technology services, over revenue from less-profitable
business lines, including consumer PC sales. Dell has made more
acquisitions, bulking up its nascent software business this year
with deals for data-backup provider AppAssure Software Inc. and
business-product developer Quest Software Inc. (QSFT).
Many of Dell's enterprise-focused businesses have helped to
cover the PC businesses' declines. Revenue from Dell's
business-focused server and networking segment grew 14% in the
latest quarter and delivered strong margins, which helped to drive
a slightly stronger-than-expected quarterly profit even as sales
declined.
Dell's three non-consumer segments each improved their operating
margins over the previous quarter, a fact that J.P. Morgan analyst
Mark Moskowitz said "affirms that Dell's strategy of targeting and
harvesting more profitable revenue remains intact."
PC sales still make up more than half of Dell's top line,
however, clouding its full-year forecast. Revenue dropped even in
high-growth emerging markets, with sales from Brazil, Russia, India
and China down 15%. Mr. Gladden blamed much of the weakness in
emerging markets to "pockets of aggressive competitive behavior"
from rival PC makers.
"At the lower end, lower-value segments were places where we saw
the most aggression and, to be honest with you, we avoided some of
that," he said.
Needham & Co. analyst Richard Kugele likened Dell's
transformation strategy to Noah building his ark before the
flood--in Dell's case, the deluge of cheap PCs and softer demand is
hitting its bottom line.
"But what if Noah took too long and [he] only built the Ark on
nights and weekends, not wanting to disrupt his daily routine?" he
asked in a note to clients. "We are concerned that Dell's
transition, while correct in our view, may be moving too slowly to
insulate the company if the mobility deluge swamps the
industry."
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com.
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