Dell Earnings Slip Amid Wider PC Slump

Dell Earnings

Dell (NASDAQ: DELL) on Thursday reported revenue in line with expectations, but net income took an even bigger hit than expected despite the company’s newfound emphasis on operating efficiency.

For its first fiscal quarter, ended May 1, earnings sank to $290 million, or 15 cents per share, a 61 percent drop from $784 million, or 38 cents per share for the same quarter last year. Analysts surveyed by Reuters Thompson had been expecting earnings in the range of 23 cents per share. Sales sank 23 percent to $12.3 billion. Analysts had predicted $12.6 billion.

Operating expenses were down $101 million from the previous quarter and $312 million from last year’s first quarter. Operating income was $414 million. Cash flow from operations was $761 million, as Dell ended the quarter with $10.7 billion in cash and investments. Dell said so far it had reduced about $1.8 billion from its planned $4 billion in operating expense cuts.

Despite the grim numbers, company founder and CEO Michael Dell said there’s reason to remain confident.

“What we’re seeing is a big deferral of purchases among corporations, but they’re planning on a pretty big 2010 client refresh,” Dell said during a conference call with analysts. “They are playing with Windows 7, they’ve passed over [Windows] Vista and are planning for that now. The client installed base is getting pretty old in these companies and there will be a pretty powerful cycle of upgrades in the client department.”

Dell derives most of its sales from hardware, as opposed to its chief competitor HP (NYSE: HPQ), which has a large services business. It was services that helped HP avoid a severe year-over-year plunge.

But Dell’s Large Enterprise business fell 31 percent to $3.4 billion, as many large IT customers defer spending. One bright spot was that revenue from EqualLogic storage systems was up 71 percent. CEO Dell said that EqualLogic’s business is four times what it was when Dell bought the company.

Public revenue, which is revenue from government sales, fell 11 percent over the same time last year, while consumer product revenue was down 16 percent and SMB income fell 30 percent.

Finding bottom?

Despite the optimistic economic outlook Intel chief Paul Otellini shared during his company’s earnings call last month, Dell isn’t feeling as positive about an industry turnaround.

“We don’t believe there’s enough momentum to call a bottom yet,” Dell CFO Brian Gladden said during today’s conference call. “Businesses have been conservative with IT budgets and we believe they will be slow in coming back.”

“Our direct customer relations and tight supply chain help us see demand signals earlier than any other company in the industry. We saw muted demand in quarter, while the second half was better but driven by typical seasonality. When taken as whole, we don’t see enough to call a bottom yet,” he added.

Long a direct sale company, Dell has moved into the retail channel. One analyst on the call pointed out that Dell has 30,000 retail outlets while rival HP has 80,000, but Michael Dell defended the current status.

“We don’t necessarily want to increase the number of doors. I think there are new countries where we want to do that. For example, in China and India, we added about 3,500 doors on a sequential basis. We’ll be looking to do it selectively,” he said. “Looking at the U.S., we’ve got great big partners and don’t see a need to open a lot more doors here in the U.S.”

Update adds comments from the conference call.

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