Dell's In-Progress Recovery

Quarterly results show that the turnaround is taking hold at the world's No. 2 PC maker. But much work remains to be done

by Louise Lee

Just weeks after closing the books on an internal accounting investigation, Dell (DELL) announced quarterly results that exceeded analysts' forecasts and suggest the computer maker's turnaround is gaining steam.

Dell on Aug. 30 reported higher profits and sales for its fiscal second quarter, helped by cost-cutting and strength in products and services for business customers. The company also got a boost from industrywide trends including falling component costs and rising average PC selling prices.

Modest Gains Outshone by HP

As upbeat as the results were, analysts couldn't help comparing them with those of competitor Hewlett-Packard (HPQ), which on Aug. 16 reported strong fiscal third-quarter results, fueled by a 29% jump in PC sales. HP, the world's No. 1 PC maker, also jacked up projections for the rest of the year (see BusinessWeek.com, 8/16/07 "HP: 'Firing On All Cylinders'").

Contrast that with the performance of Dell's core PC unit: Revenue in that business gained just 3.4%, to $8.9 billion. "There is still a lot of work to do in its PC business, so Dell is still a work in progress," says Gartner (IT) analyst Charles Smulders.

Laptops Lag, Servers Surge

Much of that work is under way. Dell has begun selling a few models in Wal-Mart Stores (WMT) and other retailers around the world, ending a long-standing practice of selling to consumers exclusively over the phone and online.

And it recently launched a line of laptops in a range of colors, although the company has said demand outstripped its ability to make timely deliveries (see BusinessWeek.com, 6/27/06, "Dell: Color It Competitive?"). In particular, the company in recent weeks hasn't been able to produce laptops in some of the colors customers want most. "Dell wants to experiment and take risks, but with that can come problems," Smulders says. "But it could not continue on the same path and needed a new way to brand itself."

Dell said net income for the quarter ended Aug. 3 was $733 million, while revenue was $14.77 billion, helped by gains in services for corporate customers and by rising demand for servers, the computers that run Web sites and corporate networks. "Overall, these numbers are all moving in the right direction," says Brent Bracelin, analyst at Pacific Crest Securities. Bracelin added that in coming months, Dell and the industry as a whole won't continue to benefit from trends in component costs, which are on the rise again.

Ongoing Restatements, Investigations

The most recent results are preliminary, as Dell has not filed certain reports for past quarters with the Securities & Exchange Commission. In the year-ago period, Dell reported net income of $502 million on sales of $14.09 billion. But Dell is restating more than four years of past financial results following the conclusion of a lengthy internal accounting investigation (see BusinessWeek.com, 8/17/07, "Dell Talking Again After Audit,"). Separate investigations by the SEC and the U.S. Attorney in the Southern District of New York are ongoing.

Dell, which doesn't disclose its own internal projections, didn't host a conference call for analysts but said it will hold a call Nov. 29 when it next discloses quarterly results. In the most recent period, Dell had $102 million in costs related to payments for expired in-the-money stock options. Almost half of that amount went to former Chief Executive Officer Kevin Rollins, who left the company early this year. The company also recorded a $59 million charge for expenses related to its accounting investigation.

The company, which is based in Round Rock, Tex., has scheduled a shareholder meeting for Dec. 4 and an analysts' meeting for Apr. 2 and 3. Meantime, investors and analysts are likely to keep looking for still more positive signs from the company. "The actions taken by management, the changes to the sales model and to the supply chain are all helping," says Bracelin. "Dell is making progress."

Lee is a correspondent in BusinessWeek's Silicon Valley bureau
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