Dell Inc. (DELL:US) declined the most in three months after cutting this year’s profit forecast as revenue from corporate customers fails to counter shrinking personal computer sales.
The company yesterday forecast third-quarter revenue that missed analysts’ estimates and cut its profit outlook by 20 percent, as competition from Apple Inc. (AAPL:US)’s iPad and an anemic global economic recovery drags down PC demand.
Chief Executive Officer Michael Dell’s strategy of using acquisitions (DELL:US) to add software, storage and networking equipment has been slow to offset declining sales of desktops and laptops, which account for half (DELL:US) of revenue. Consumers and businesses increasingly favor the iPad and other tablet computers over traditional machines.
“It’s a half-decade journey or more for Dell to transition from where they have been to more enterprise sales,” said Frank Gillett, an analyst at Forrester Research Inc. (FORR:US) “It’s a long transformation project.”
Since Dell is so reliant on business sales -- just 18 percent of revenue was from consumers last quarter -- it’s subject to long upgrade cycles for PCs running Microsoft Corp. (MSFT:US)’s operating system, Gillett said. The next version, Windows 8, is due out in October.
“In general companies tend to be slow to do upgrades and they’re being even more conservative this time,” Gillett said.
Dell fell 5.4 percent to $11.68 at the close in New York, the biggest decline since May 23. The stock has lost (DELL:US) 20 percent this year.
Business customers are taking “a wait-and-see approach” on forthcoming tablets based on Windows 8, Chief Financial Officer Brian Gladden said on a call with analysts yesterday.
Revenue in the current quarter that ends in October will decline 2 percent to 5 percent from the prior three-month period, the Round Rock, Texas company said in a statement yesterday. That’s the equivalent of $13.8 billion to $14.2 billion in sales, less than the $14.9 billion average analyst estimate (DELL:US), according to data compiled by Bloomberg.
Fiscal 2013 earnings excluding some items will be at least $1.70 a share, including a 2- to 3-cent dilutive impact from the pending acquisition of Quest Software Inc. (QSFT:US) That’s less than the company’s February projection of at least $2.13 a share, and also missed the average $1.90 estimate.
The computer industry’s transition to Windows-based tablet PCs is also causing retailers and commercial resellers to reduce stock, overshadowing Dell’s gains in sales to companies.
“Enterprise demand obviously in the second quarter was solid,” CEO Dell said on the conference call. “Increasingly we’re changing the sale to be a complete data center sale.”
Dell is hiring Marius Haas, a former adviser at KKR & Co. and executive at Hewlett-Packard Co. (HPQ:US), who’ll join the company as president of enterprise solutions. Brad Anderson, who had held the position, is leaving Dell.
Haas “inherits a business that is growing and in great shape,” Gladden told analysts. Last month, Dell agreed to acquire Quest, a maker of programs to manage corporate computer systems, for about $2.4 billion. In May, Dell bought closely held Wyse Technology Inc. to gain desktop devices used by cloud- computing customers.
Yet even past growth engines such as Dell’s own storage products and enterprise services are slowing, ISI Group Inc. analyst Brian Marshall said in a note to clients yesterday.
Dell-owned storage devices, not counting those it resells on behalf of EMC Corp. (EMC:US), rose 6 percent in the second quarter after three straight quarters of 20 percent growth, he said.
Second-quarter net income fell to $732 million, or 42 cents a share, from $890 million, or 48 cents, a year earlier. Earnings excluding some items were 50 cents a share, compared with an average analyst estimate of 45 cents.
Sales in the second quarter, ended in July, declined 7.5 percent to $14.5 billion, missing analysts’ $14.6 billion average estimate. Consumer revenue tumbled 22 percent to $2.6 billion in the quarter on waning demand for PCs. Sales of enterprise services and solutions, which includes data-center products, climbed 6 percent to $4.9 billion.
“Part of the problem Dell is having is the macro environment,” said Maynard Um, an analyst at Wells Fargo Securities in New York. “The end markets are not buying,” though the company has done a good job controlling expenses,’’ said Um, who has a market perform (DELL:US) rating on the stock.
While enterprise revenue growth will persist, declining PC sales prompted Dell to cut its full-year forecast, Gladden said in an interview. “The second half is a little bit more challenging” as retailers and distributors waiting for the release of Windows 8 hold off on orders, he said.
The Microsoft operating system, designed to run on tablets as well as traditional PCs, may give PC makers a counterweight to Apple’s iPad in the touch-screen device market.
Dell is one of four PC makers Microsoft said would offer tablets using Windows RT, a version of the software tailored for chips from ARM Holdings Plc. (ARM) Gaining a presence in tablets is important for Dell, which has said desktop and laptop sales will be little changed over the next three years.
Global PC sales stalled in the second quarter, a seventh straight period of anemic growth, market researcher Gartner Inc. said last month.
-- Editors: Lisa Rapaport, Ben Livesey
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