Dell: No Relief in Sight

Dell's first-quarter sales and profit were down, with a grim outlook on the PC market. But with $10 billion in cash, it could ramp up its M&A

By Aaron Ricadela

Dell dispensed a dose of reality to investors who hoped tech's worst days were over. The computer maker said May 28 that first-quarter earnings tumbled 63%, and sales dropped 23%. On the heels of a tepid sales forecast from rival Hewlett-Packard last week, Dell's report showed that corporations shied away from buying computers in recent months and that they're holding off on placing new orders.

"We're seeing a big deferral of purchases among corporations," Dell CEO Michael Dell said on a conference call discussing results for the period that ended May 1. It was the second straight quarter of big profit declines at Dell, whose net income dropped 48% in the period that ended Jan. 30. Worse, the company doesn't see prospects for improvement. "We don't believe there's enough momentum to call a bottom yet," added Chief Financial Officer Brian Gladden.

Investors pushed shares of Dell (DELL) higher in extended trading, partly on the hope that companies will replace their aging fleets of PCs next year after Microsoft (MSFT) introduces its Windows 7 operating system, the successor to its poorly received Windows Vista software, which many companies skipped buying.

Mixed Signals

Shares of Dell have risen almost 35% in the past three months. But further gains may come only when it becomes clearer how quickly businesses will buy new PCs. Sales of desktops and notebooks account for 58% of Dell's sales. "You'll see a lot of bad news continue in the PC world for the time being," says Jayson Noland, a senior analyst at Robert W. Baird, who has a hold rating on Dell's stock. Dell shares had risen 36¢, or 3.2%, to 11.48 on May 28. They added about 1% in extended trading.

Wall Street is getting mixed signals from tech industry bellwethers. HP (HPQ) on May 19 said it expects sales to decline 4% to 5% in fiscal 2009, which ends in October. On the other hand, Intel (INTC) CEO Paul Otellini recently said that demand is returning to normal patterns in the current quarter, and executives at IBM (IBM) and Cisco Systems (CSCO) have said that tech demand had reached a nadir.

Dell's results barely exceeded analysts' earnings forecasts after discounting the cost of severance packages and facilities closures. Net income was $290 million, or 15¢ a share. Excluding 9¢ in restructuring expenses, Dell earned 24¢, vs. Wall Street's expectation of 23¢. Sales were $12.34 billion, vs. expectations of $12.66 billion. A year earlier, Dell earned 38¢ on $16.08 billion in sales.

Losing Share to HP

The pain was spread across Dell's businesses. Desktop computer sales fell 34%, notebook sales were down 20%, and sales of corporate server computers declined 25%. Dell has been losing share in PCs to HP, now the No. 1 seller of PCs in the U.S. and worldwide. Dell also faces more vigorous competition from Taiwanese vendor Acer, which has been gaining share.

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