March 1, 2007 2:14 PM PST

Dell's PC business drags down earnings

Dell's nightmare of a fiscal year is over, but it didn't exactly go out in style.

The company reported revenue of $14.4 billion, sharply below Wall Street's already reduced estimates of $14.9 billion, for its fourth fiscal quarter ending February 2. Profits were actually a bit higher than expected, with earnings coming in at 30 cents per share, compared with reduced expectations of 29 cents per share.

Dell had warned investors that fourth-quarter revenue and profits would fall short of expectations when it announced the resignation of former CEO Kevin Rollins in January. Analysts surveyed by Thomson First Call had originally been expecting revenue of $15.3 billion and earnings per share of 32 cents.

Compared with last year's fourth quarter, revenue was down 5.3 percent from $15.2 billion, and earnings per share were down 30 percent from 43 cents per share. These results are only considered preliminary; they are subject to change pending the outcome of internal and external investigations into the company's accounting practices, and they're unlikely to change for the better.

The investigations involve "certain accounting and financial reporting matters, including issues related to reserves and other balance sheet items," Dell said in a filing with the Securities and Exchange Commission Thursday afternoon. Bob Pearson, a Dell spokesman, declined to comment further on the specifics of the investigation other than to note that Dell is complying with the SEC and conducting its own "thorough" investigation of the matter.

Dell executives maintained their silence in reporting the poor results, declining to hold a conference call with the financial analyst community. The company does not plan to hold a conference call related to its earnings until the investigation into its accounting practices is completed, Pearson said.

Dell took an $89 million charge to pay for costs associated with the investigations during the quarter, the company said. This negatively affected earnings per share by 3 cents.

In its earnings press release, the company chose to highlight its growth outside of the U.S. and its server market growth. International unit shipments reached an all-time high, and revenue from international shipments now makes up 46 percent of Dell's total revenue. Server revenue inched up 2 percent from $1.4 billion last year to $1.5 billion this year.

But the numbers reported by Dell's core PC business were not good. Revenue from mobility products--essentially notebooks--dropped 2 percent on only a 2 percent increase in unit shipments. Desktop sales were even worse, with unit shipments declining 18 percent and revenue declining 17 percent. "Those numbers suggest to me that there's not a demand issue anywhere but Dell," said Stephen Baker, an analyst with The NPD Group.

The notebook factor
To some degree, the entire PC market is experiencing a shift in demand. Desktop PCs are falling out of favor with consumers in developed economies, who are switching to notebook PCs. And corporate customers--which account for a large portion of Dell's revenue--have eased back on their purchases over the last few months as they evaluate Microsoft's new Windows Vista operating system, especially in the U.S.

Dell, however, has been hit harder than most by such trends, because those segments--desktops, corporations and U.S. customers--have been its historical strength. Dell lost market share during the fourth calendar quarter, according to both IDC and Gartner.

Retail consumers have already expressed a clear preference for laptops--snapping up two notebooks for every desktop this past holiday season. And while corporations haven't shifted as quickly, they are headed in that direction. "That's a structural market shift that's moving away from Dell's strengths," Baker said.

In an ironic twist, Dell's poor performance helped boost its income. The company did not pay out $184 million in employee bonuses because it failed to meet its goals for the year, adding 6 cents to its earnings per share for the quarter.

Meanwhile, the company is taking steps to turn around its business. Michael Dell reinstated himself as CEO of the company, and he has brought on several heavy hitters, such as Ron Garriques of Motorola and Mike Cannon of Solectron, to run the consumer business and manufacturing organization, respectively. Rollins remains employed by Dell until May, but he does not come into the company's Round Rock, Texas, offices on a regular basis and is not playing a part in the company's reevaluation of its strategy, Pearson said.

Dell needs to make several changes, including a re-examination of its distribution and manufacturing strategies, but righting its ship on the product side should be job No. 1, Baker said.

"The thing we forget about Dell, until the last couple of years, they were the enthusiast company, the cutting-edge company," he said. "You could get the best desktop or notebook at a pretty good price (from Dell). They need to get back some of that swagger on the product side."

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14 comments

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Why we quit ordering Dell
My company hasn't ordered any new Dell systems in quite some time. Dell quit selling systems with legacy ports, made it impossible to tell which had them and which didn't, and generally won't let us order systems configured the way we want. So, duh, we quit buying. Are you listening Dell?
Posted by bdaughtry (169 comments )
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Michael Dell should sell the company and give shareholders money back
Oh, sorry.
That's what he said about Apple a few years ago.

I guess Vista hasn't helped PC sales.
Posted by technewsjunkie (1265 comments )
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What, you need a parallel printer port????
I bet you also run Windoze 95.

What "legacy port" do you need and why?
Posted by Dr Dude (49 comments )
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Why so nasty?
Well, I'm not the original poster, but I do install a lot of PCs for a lot of clients.

I'm surprised at your really nasty tone - do you not understand that some people out there might have a laser printer that has worked great for 10 years and would rather not buy a new one just because their PC is missing a $1 part? I've had several users get such a nasty surprise. I've had to install print servers for them mostly, a really complicated solution to a very simple problem.

I have no problem with not including the parallel port, but it should be made obvious when you order the system. I would have happily paid a $10 fee to have it included in those systems, would have saved my customer over $100 in time and hardware.
Posted by cameronjpu (178 comments )
Link Flag
Only so much junk they can push...
I'm surprised that so many fools have bought their crap for this
long. There must be plenty of people who think so little of
themselves that they would subject themselves to such low level
garbage.

Dell can only show innovativeness or creativeness when it comes to
accounting and granting stock options. Their pitiful trash boxes
belong on Walmart's bottom shelf.
Posted by Dr Dude (49 comments )
Reply Link Flag
The Notebook Factor
The article states: "Retail consumers have already expressed a
clear preference for laptops--snapping up two notebooks for
every desktop this past holiday season."

Herein lies Dell's biggest problem. Who cares how heavy a
desktop computer is or what it looks like, though, for the most
part, Dell's are okay. But EVERYONE cares about the computer
they have to lug around, and Dell's laptops leave a lot to be
desired. They are clunky, heavy and look like yesterday's
technology.

Dell has a long way to go to catch up with the quality and styling
of the laptop offerings from Sony, Apple, Toshiba and others.
Not to mention their "Outsourced-to-India" support is among
the worst in the industry. Good luck, Dell. You need it.
Posted by GoDisplay (12 comments )
Reply Link Flag
You screw me - I screw you
I ordered a Dell laptop. After an hour arguing with an Indian customer service representative on why I should have a legal copy of an application ( It said in writing it came with it!), I got nowhere. I told the rep I would never buy another Dell again. He said ok.

Mr. Dell is losing customers "one at a time".
Posted by GrandpaN1947 (187 comments )
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Dell's PCs are the WORST
Good thing Dell has diversified, since the product that made their name-- PCs-- is now their worst one.

Memo to Michael Dell: move your assets to something you can make better than PCs. Snow tires, pinatas, shoe lifts, rat bait-- there must be something your company is better at making.

Sure can't be PCs. Your PCs stink on ice.
Posted by HansinYabutay (31 comments )
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Dell's are not the WORST
I buy a fair amount of equipment each year, and find that Dell computers suck about the same as most other major PC manufacturers. None of them, IMO, are anything to brag about. (Our highest quality machines were purchased from that "fruit company)

So, all things being equal, I buy Dell because they have facilities in our state. I spent our dollars as close to home as possible, when it makes economic sense to do it.
Posted by rcrusoe (1305 comments )
Link Flag
I am much Happier with HP these days...
HP seems to listen to my customer needs and lets me order my business PC's regardless of if my salesperson is in the office or not. Dell would not allow me to order PC's this way and I was only assigned one person who characteristically would drop the ball on orders and not follow up with service after the sale. I also was sold defective PocketPC's and they made it very difficult for me to receive replacement product.

Sorry to say, but the folks at Dell didn't give a rip so now I don't give a rip about Dell either...
Posted by pilaa (253 comments )
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Terrible service
I bought my last notebook from Dell 4 years ago and I need a new one. So I do the obvious thing and go to Dell's website to check out what they have on offer. But I was completely put off from ordering from them for two reasons; completely Unapproachable customer service, and a website that lies.

In the latter case, I click on a range of notebooks like the Precision and it says something like "£1,500 click here to configure and buy". So I click on it then the price jumps up to £1,700. How did that happen? What happened to my £1,500 notebook? I feel like they have just tricked me. Also, the website often never loads quite right in my browser, IE6.

And in the former case, customer service, I tried calling up to ask them why the website is trying to trick me with the prices. What a journey that was; I went through four different people who could not help and just transferred me to another department. Finally I asked the fourth woman's name and she hung up on me! Thank goodness I didn't actually buy from Dell.
Posted by mylesJ (5 comments )
Reply Link Flag
dell
I have to say, I never understood why you'd pay extra to get a box that does less...and that's essentially what you get with proprietary dell boxes...something that you cannot upgrade later. A pentium D machine had to be sold on e-bay, because the chipset couldn't support the pin compatible core 2 processor...sometimes a BIOS update, at worst a motherboard swap...on another brand. But on a proprietary Dell, it means sell the machine on e-bay.

WEll it wasn't replaced with a Dell. My employer bought me another dell, I didn't ask for it. I saw the invoice, they paid about $1800 for it. I paid $900 for my machine at my house, which is more powerful.

If the world is moving to notebooks (I guess I'm the last adopter to this trend)....then Dell should look to sony for ideas...Dell notebooks are heavy bricks...I like the sony's with their small form factors....well they tempt me the most.
Posted by rdupuy11 (908 comments )
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It's no mystery why
If Mr. Dell is wondering why his PC business is failing, he should open up and compare the inards of his current offerings to those he made 5-6 years ago. Cutting every possible corner to maximize profit to re-invest in the company's other businesses may have made sense if their intention was to exit the PC business, but not if they wish to remain in the PC marketplace. Similarily, an anonymous call to his tech support should enlighten him to the lack of response his customers are complaining about. A company can only live so long on it's past reputation.

For several years I recommended Dell's PC products due to it's mix of quality, price, performance and service, but not for some time now. They have fallen to last on the list, behind even HP and eMachines, and losing more ground with each generation.
Posted by duke007z (2 comments )
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Who painted the big picture?
In the Dell headquarters, I mean. In my former job, global bank, everything became dell at really low prices. But the bank had a policy: the order was submitted to dell only after grouping a minimum (huge) lot of staff needs. Some times, it took a year to fullfill a request, because when the the order lot was complete, the deparments already shifted the budget for other purposes and gave up of it.

As a Dell laptop owner, I see no Dell equipment anywhere but in some big companies. On the other hand, computer retailers sell everything but Dell. Even the huge supermarkets sell everything but Dell. By everything I mean Sony, HP, Toshiba, Asus, Acer, etc. etc.

I see HP and Sony promotions and demonstrations everywhere, even in the mall corridors, side by side with the Citi bank credit card boots. I don't see Dell.

Dell is a US company, focused in the US market. Dell is not a Global Company. For us, in Europe, Dell is a untrusted and expensive pc assembler who sells stuff through a US site. Period.
Posted by trialmanager (16 comments )
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