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Dell Sales, Earnings Fall Short of Expectations

Dell earnings
Dell (NASDAQ: DELL) has yet to show signs that it's seen the same boost from an expected resurgence in PC demand as have chipmakers Intel, AMD and nVidia -- with the company today reporting third-quarter results that came in short of analyst projections.

Dell, which has fallen to third place in the worldwide PC market, reported third-quarter earnings of $0.23 per share excluding one-time items, down from $0.37 a share this time last year.

For the quarter ended Oct. 30, the PC giant reported sales of $12.9 billion, a 15 percent decline from the $15.16 billion it took in during the same quarter last year. Net income of $337 million, or $0.17 per share, was down 54 percent from the $727 million, or $0.37 per share last year.

Analysts who follow Dell expected the company to report a profit of $0.28 a share on sales of $13.18 billion, according to an aggregate of analyst projections from Thomson Reuters.

The quarter including just one week of availability of Windows 7-based systems, which meant the company couldn't benefit from an expected lift in sales due to the new OS.

Instead, Dell noted that shipments during the quarter were flat sequentially and down 5 percent from the same quarter last year, although it did note that the large enterprise and small and medium business segments had sequential improvements in shipments, revenue and operating income.

Dell had good news in other areas as well. Cash flow from operations totaled $801 million. Over the past four quarters, the company has generated $3.4 billion of operating cash flow, up more than 40 percent from the previous four quarters.

It has also managed to contain expenses, a project the company has been undertaking for some time. Operating expenses were 12.8 percent of revenue, or $1.7 billion in the third quarter of 2009, 10 percent lower than last year's third quarter.

"We're encouraged by our results, especially in large enterprise and SMB markets, where we saw growth for the first time in seven quarters," CFO Brian Gladden said during the company's earnings call today.

"We also made solid progress on key strategic initiatives. That includes the cost structure of company, a differentiated enterprise strategy and strong cash flow from operations," he said. "We grew sequentially for the second quarter in a row and expect the fourth quarter to be better than the third.

While much of the IT sector had been expecting a surge of demand from the debut of Microsoft (NASDAQ: MSFT) Windows 7, Gladden said Dell had been adversely affected by timing of the new OS's launch, causing more backlog than normal.

However, he added that the situation is expected to return to its normal levels in the fourth quarter.

"We're seeing more client activity in the last 30 to 60 days than we have in a long time, and the pipeline for client activity going forward into next year is the strongest its been in a long time as well," he said.

Upswing in the near future?

The quarter showed modest gains but compared to the same quarter last year, Dell got hammered. Large enterprise sales rose 4 percent from the second quarter, but remained down 23 percent on the year. Public sector spending, Dell's largest business, rose 3 percent sequentially but fell 7 percent year-over-year.

The company's SMB business gained 5 percent sequentially but fell 19 percent year over year, while its consumer sales slipped 1 percent sequentially and fell 17 percent from a year ago.

In particular, demand fell in the two weeks prior to the release of Windows 7 but then picked up, with strong demand since the launch that has carried over into the current quarter, according to Gladden.

[cob:Special_Report]During the quarter, the Americas and Asia showed momentum while EMEA (Europe, the Middle East and Africa) had "challenges," he said. Meanwhile, the BRIC market -- Brazil, Russia, India and China rose 16 percent sequentially.

Gladden did not make financial projections for the fourth quarter beyond some general predictions. He said Dell would see typical fourth-quarter holiday demand, which isn't that big for the company since 80 percent of its business is commercial.

Overall, he said revenue would be strong given demand trends for new PCs with Windows 7. Meanwhile, the firm anticipates some part tightness and issues with component costs, he added.

Next year, however, is when CEO Michael Dell expects things to pick up.

"I would not be surprised to see sequential growth well into the teens," he said during today's call. "These IT managers know they cannot extend the life of these client assets forever. It won't happen at once but it will be a rolling refresh that occurs over 18 months. I can't remember a time when a very high percentage of [IT customers] skipped an entire operating system. We remind them and they know Windows XP is eight years old."

During the call, Dell faced questions regarding the issue of rebates from Intel (NASDAQ: INTC) -- a key part of the antitrust cases pending against the world's largest chipmaker. Dell's name had come up the most in the documents released publicly surrounding the now-settled Intel-AMD antitrust suit in particular.

In response, Dell walked a careful tightrope. "One thing that's been forgotten in all this talk about rebates is that it's about the net cost of the components, not the rebate that matters," he said. "We do everything we can to negotiate the lowest net cost."

"Obviously this is a competitive industry and it demands that."

Update includes comments from the earnings call.