Dell Seems In Trouble As PC Sales Slump: Disappointing Results, Gloomy Outlook

By Alexandra Burlacu | Aug 22, 2012 12:14 PM EDT

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Dell, Inc. reported sluggish second-quarter profits and warned of more trouble ahead, as revenue from cloud computing fails to counter slumping PC sales. Dell is mid-transition from its original business selling PCs, re-shaping itself into an enterprise and cloud-computing company.

On Tuesday, Aug. 21, Dell reported that profit for its fiscal period ending on Aug. 3 declined 18 percent as revenue dropped 8 percent. The company also warned of another revenue decline for the current quarter and substantially lowered its full-year earnings forecast.

"We're trying to be realistic," said Dell's chief financial officer Brian Gladden, referring to the company's projection for the rest of the year. According to him, Dell's newer businesses selling products and consulting services to corporations are doing well.

Dell had projected record full-year earnings at the beginning of the fiscal year, but on Tuesday the company blamed its poor performance on lower demand for personal computers, as well as a sluggish economy overall.

The announcement on Tuesday marked Dell's second straight quarter of disappointing results, driving down its stock price by 18 percent since late May. The company's shares dropped 4.5 percent to $11.79 in after-hours trading Tuesday, following the announcement.

As expected, the company's latest results and projections disappointed some analysts, who expressed concerns that Dell has not made more significant progress in focusing on products for businesses rather than consumers. Sales to large businesses declined 3 percent from the previous year, while sales to public sector organizations such as schools and governments fell 6 percent. Meanwhile, sales to small and medium businesses dropped 1 percent from a year ago.

"They haven't delivered the data points they've promised," said Mizuho Securities USA analyst Abhey Lamba, as cited by the Wall Street Journal.

Dell's PC business still accounts for half of its revenue, and this is a big part of the problem. According to research firm Gartner, the industry has seen little growth, and Dell sold fewer PCs in the second calendar quarter of 2012 than the previous year. Dell reported revenue from PCs and related products in the second quarter dropped 14 percent from a year earlier, while consumer sales of those products fell 22 percent, leading the downward trend.

Gladden also noted that consumers turned toward cheaper PCs during the quarter, and warned that Microsoft's new Windows 8 OS due in October may further hurt current-quarter sales, as customers hold off on purchases until the new operating system makes its debut.

Sales to large businesses declined 3 percent from the previous year, while sales to public sector organizations such as schools and governments fell 6 percent. Meanwhile, sales to small and medium businesses dropped 1 percent from a year ago.

According to Dell's projections, sales in the current quarter may drop between 2 percent and 5 percent from August. The company projected earnings per share of at least $1.70 for the full fiscal year, excluding items. Earlier this year it had projected earnings per share of at least $2.3.

Dell's news, however, was not all bad. Sales of servers and networking products grew 14 percent from the previous year, while Dell's services business climbed 3 percent. The company has projected future growth on sales of these products and others, such as software and storage systems, to businesses.

Dell formed a software group earlier this year, and has since enriched it through a series of acquisitions. During Tuesday's announcement Dell also named former HP executive Marius Haas as the new president of the group responsible for servers, networking, and storage products.

Overall, Dell reported second-quarter income of $732 million, i.e. 42 cents per share, down from $890 million, or 48 cents per share, in the same period a year ago. Revenue dropped to $14.5 billion from last year's $15.7 billion.