Computers

Dell: Scant Signs of Recovery


The signs of recovery that are showing up in parts of the computer industry are hard to find at Dell. Dell ( (DELL)) is embattled by cutthroat pricing, costly components, and lackluster corporate demand, company executives told Wall Street analysts at a meeting in Austin, Tex., on July 14. The day before, Dell announced that it expects a "slight sequential revenue increase" for its second quarter, which ends July 31, but said weak corporate demand for computers will sap its profit margins. Dell's performance contrasts with results released on July 14 by computer chip maker Intel ( (INTC)), which reported better-than-expected sales and issued an upbeat forecast for the second half. Intel has called a bottom to the recessionary falloff in tech demand. The company's second-quarter earnings exceeded Wall Street's estimates. Chief Executive in April said PC sales had bottomed and in May said second-quarter chip sales were returning to normal seasonal patterns. If the outlook is brightening for Intel, the world's largest maker of chips for PCs, why isn't it improving as quickly for Dell, one of the biggest makers of computers? Dell gets most of its revenue—77%—from businesses and government agencies. And companies beset by recession are holding off on PC purchases, analysts say. In a July 14 research note, senior analyst Jayson Noland, who has a "neutral" rating on Dell's stock, said: "A meaningful PC refresh may be delayed" as companies prioritize new servers over PCs and look at virtualization technology as a way to extend the life of older desktops and notebooks. Windows 7 Upgrades Will Take Time Concern that Dell won't quickly benefit from a PC industry rebound is likely to slacken a rally in the company's shares. The stock has risen more than 18% since May 28, when Dell reported dismal first-quarter earnings. Investors were hoping that corporations might be on the cusp of replacing aging fleets of PCs when Microsoft releases Windows 7. Shares of Dell closed July 14 at 11.97, down 1.05, or 8%. Microsoft ( (MSFT)) is releasing the long-awaited new version of its Windows operating system in October, but says most corporate upgrades to the new system won't happen right away. Shaw Wu, senior analyst at , rates Dell shares a "hold." On July 14 Wu cut his fiscal 2010 revenue estimate for Dell to $51.4 billion, from $51.6 billion, and reduced his earnings estimate by a penny, to $1.04 per share. Dell's cost-cutting—the company is in the process of slicing more than $4 billion in expenses by the end of its fiscal 2011—may be masking performance, he said in a research note. "We continue to be concerned with constant restructuring making the quality of [Dell's] earnings suspect," he said. , Dell large enterprise president, said in an interview in June that "it's way too soon to tell" how much IT departments will budget for new PCs in 2010. Dell: A Longer-Term Rebound Market researcher Gartner ( (IT)) is getting more bullish on PC sales for the year and even expects the market to grow in the fourth quarter. But shipments will decline for the full year before posting a 10.3% unit increase in 2010. So a near-term recovery remains elusive for Dell. On July 13, the company said sales in its fiscal second quarter will slightly exceed the $12.34 billion recorded in first-quarter revenue. In the second quarter of last year, sales were $16.43 billion. Dell also said it expects second-quarter profit margins to decline before rebounding in the longer term. Dell's operating income in the first quarter ended May 1 was 3% of sales. Assuming higher IT spending by companies in the future, Dell said it expects sales to grow 5% to 7% in coming quarters, with operating income of at least 7% of sales. Speaking at the analyst meeting on July 14, Dell Chief Financial Officer said that while orders are stabilizing, they remain significantly below year-ago levels. Large corporations and small and midsize businesses continue to sit on the sidelines, he said. Consumer spending remains a bright spot, but cutthroat pricing is pressuring PC margins, even as the cost of components such as memory and LCD screens are rising. Gladden said in a statement that demand for Dell's products "seems to have stabilized." That's a more bullish reading of the computer market than he made during Dell's first-quarter earnings call in May, when he said it was too soon to "call a bottom" to falling demand. Nevertheless, Dell looks destined for a long, slow grind before it returns to anything resembling its former strength.
Aaron_ricadela_75x75
Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in Frankfurt.

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