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Dell Profit Falls, Still Beats Expectations

Dell earnings
Thanks to a focus on controlling expenses and the decline in PC buying beginning to level off, Dell (NASDAQ: DELL) today reported quarterly profits that just beat Wall Street expectations.

It managed to top profit expectations thanks to its continued focus on corporate efficiency, similar to what IBM (NYSE: IBM), Intel (NASDAQ: INTC) and other firms have been doing.

For the quarter ended July 31, Dell's profit of $472 million, or $0.24 per share, declined 23 percent from the $616 million, or $0.31 per share, it reported a year ago.

Still, that came in above the $0.23 per-share estimate from Wall Street analysts, according to Thomson Financial.

"We're generally pleased with the results of the second quarter," CFO Brian Gladden told a conference call of investors. "We've demonstrated broad progress on key initiatives over last few quarters to cut costs. Cost reduction has never been more important."

Second-quarter sales fell 22 percent from last year to $12.8 billion. They were up 3 percent sequentially from the $12.3 billion Dell reported in Q1, however. Gladden said this was "consistent with our view that demand has stabilized. It's mixed overall globally but getting better."

Dell achieved profitability in part thanks to a 14-percent reduction in expenses from a year ago, cutting $288 million from operating expenses since then. The company has been on an initiative to reduce overall expenses by $4 billion through everything from how it ships to how much cardboard is in a box.

Additionally, Dell had other bright spots to report: Its 3 percent revenue gain means the company continues to successfully battle price pressure. Unit shipments rose 10 percent from the first quarter. Combined revenue from servers and storage was up 7 percent sequentially.

Cash flow from operations totaled $1.1 billion, and Dell ended the quarter with $12.7 billion in cash and investments.

Additionally, Dell had other bright spots to report: Its 3 percent revenue gain means the company continues to successfully battle price pressure. Unit shipments rose 10 percent from the first quarter. Combined revenue from servers and storage was up 7 percent sequentially.

Cash flow from operations totaled $1.1 billion, and Dell ended the quarter with $12.7 billion in cash and investments.

Yet not everything has turned rosy for the company. Large enterprise revenue declined 32 percent year-over-year and three percent sequentially. Operating revenue was down 50 basis points, although operating expenses were down 26 percent year-over-year. Storage sakes were down 20 percent year-over-year, except for EqualLogic, which was up 42 percent.

The small to midsized business (SMB) space fell 29 percent from last year, and was strongest in Asia but weakest in EMEA (Europe, Middle East, Africa). Revenue outside the U.S. is now up to 45 percent, with the "BRIC" countries -- Brazil, Russia, India and China -- leading the way. Among those four, Dell's China business is faring the best, while its Russian business is doing the worst, Gladden said.

A "pretty powerful new cycle"

CEO Michael Dell said he was "pleased with our progress in an uneven demand environment globally. Also, I want to reiterate our commitment to optimizing revenue and operating income over time."

He spent a good amount of time during the call's Q&A session with analysts discussing his belief that sales will pick up soon if only out of necessity -- because systems are so old.

But he also said that an upswing is likely because there's so much good new technology.

"We see a pretty powerful new cycle," Dell said. "There's Nehalem [Intel's current microarchitecture]; Windows 7 is coming to replace, for many customers, Windows XP, soon to be an eight-year-old OS; there's Office 2010, which we think is a very significant addition to the client portfolio; and progress in client and server virtualization."

He added that he sees these trends adding up "to what we see as a significant product cycle going into 2010."

Dell also said that he felt datacenter virtualization will be a high priority as businesses find it "onerous" to continue using old, inefficient systems and seek to consolidate.

Similarly, the percentage of older computers based on Windows XP is very large -- representing another area likely to see interest in replacement gear.

"What I would urge you to do is go to Dell.com, buy a modern PC, put Windows 7 on it, put Office 2010 on it, and you will love your PC again," Dell added.

But he also tempered his optimism with a dose of continued concern. He said he had based this predictions on surveys of CIOs -- adding that it's not 2010 yet, spending hasn't started, and it might yet fall short of his expectations.

"Certainly there are risks here. Customers may look at Windows 7 and say 'maybe I’ll wait,'" Dell said.

But, he added, "Everything we see right now tells us it's quite positive."

Gladden said that the company believes this upgrade cycle would be predicated on an improvement in the economy, and that right now, there are still many commercial businesses down 20 to 30 percent.

Update adds comments from Dell's earnings call.