Dell Posts a 52% Increase in Profit, but Still Awaits a Wave of Corporate PC Buying

Dell Posts a 52% Increase in Profit, but Still Awaits a Wave of Corporate PC Buying
By ASHLEE VANCE
Copyright by Bloomberg News
Published: May 20, 2010
http://www.nytimes.com/2010/05/21/technology/21dell.html?hpw


Dell presented Wall Street with tidy first-quarter results on Thursday, but the numbers lacked some of the luster presented by other technology bellwethers in recent weeks.

Like the others, Dell has depended on improving demand for computing equipment to climb out of the recession. Its first-quarter results showed rising sales across its major product lines and a much higher profit than at the same time last year.

Dell, however, continues to rely on large companies to buy new PCs, more than do other PC makers, and large companies still seem content with their old machines.

“Until corporate spending really comes back, Dell will remain in the penalty box,” said Ashok Kumar, a technology analyst with Rodman & Renshaw.

This familiar refrain has haunted Michael S. Dell, the company’s founder, since he returned more than three years ago as chief executive in a bid to turn Dell into a more diverse company.

In its first quarter, Dell based in Round Rock, Tex., posted a profit of $441 million, or 22 cents a share, a 52 percent rise from the same period last year. The hardware maker’s revenue increased 21 percent, to $14.87 billion from $12.34 billion. Excluding charges, Dell earned 30 cents a share.

Both the sales and earnings figures eclipsed the forecasts of analysts polled by Thomson Reuters, who had predicted earnings, excluding charges, of 27 cents and revenue of $14.27 billion.

Sales in most of Dell’s businesses surged when compared with the same quarter last year. Desktop PC sales, for example, rose 13 percent, while laptop sales rose 18 percent. Dell’s data center equipment business did particularly well with computer server and switch sales jumping 39 percent.

“We had a solid first quarter,” said Brian T. Gladden, the chief financial officer at Dell, in a telephone interview. “Demand has picked up, especially with our commercial customers.”

But the $14.87 billion in revenue remained well off the $16.07 billion in first-quarter revenue that Dell had reported two years ago before the recession hit hard. Other companies tied to the PC industry, like Microsoft and Intel, have recently posted record all-time sales figures, and Dell’s rival Hewlett-Packard also just reported results well above prerecession levels.

Analysts also noted that Dell’s profit margins fell from last year, and company executives said that higher component prices hurt it during the quarter.

During a down day for the market, shares of Dell fell 4.4 percent during regular trading on Thursday to $14.32, and dropped another 3 percent in after-hours trading to $13.93. Dell traded at $23.50 a share when Mr. Dell took back the chief executive position in early 2007.

According to Mr. Kumar, Dell has benefited from rising interest in the sales of things like servers, switches and storage systems to corporate customers but needs the PC refresh cycle to begin in earnest for Dell to post banner figures.

Dell boomed during the years in which companies refreshed their computers at a regular pace to keep up with faster chips and quickly evolving hardware. These days, though, many large organizations view the PC and its complementary software as static. Their updates of equipment have little to do with the latest release of Windows or a similar product.

“We used to churn our PCs every three years, but now we are out to four,” said Gerry McCartney, the chief information officer at Purdue University. “Frankly, the hardware isn’t changing as rapidly in performance as it was 10 years go.”

In addition, Dell was caught off guard by the rising interest in preconfigured laptops. Such machines could be made more cheaply at factories in China than at Dell’s factories, which specialized in customizing PCs on the fly. Hewlett-Packard, Acer, Asustek and others took advantage of the Chinese factories, and Dell has since been playing catch-up by shifting more of its business to contract manufacturers.

Mr. Dell has methodically been shifting Dell’s focus away from corporate PCs by increasing the company’s presence in retail outlets, buying storage and software companies and getting back into the mobile device market with phones and forthcoming tablet computers. Dell’s biggest diversity move came last year when it spent $3.9 billion to acquire Perot Systems, a services company.

Dell’s services revenue rose 32 percent to $2.79 billion, while its product revenue rose 18 percent to $12.09 billion, during the quarter.

Analysts have long said that Dell should benefit far more than most technology companies when companies finally start upgrading their four- and five-year-old computers. Mr. Gladden said that less than 5 percent of the commercial customers surveyed by Dell have upgraded to Microsoft’s Windows 7 operating system, which is thought to be the major PC refresh catalyst.

“I think it is still very early,” Mr. Gladden said. “There are a lot of good signs, and we are beginning to see the first stages of that refresh process.”