Dell Made Less Profit On Bigger Revenue

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Dell’s revenues grew in all areas, but its profits fell by five percent – because component costs went up and it;’s not getting consumer

Dell’s fourth-quarter 2009 revenues jumped on the strength of commercial products such as servers and storage, but profits declined thanks in part to weakness in the consumer PC business.

The mixed bag of financial results that Dell executives announced were in contrast to the strong earnings unveiled by their counterparts at rival Hewlett-Packard the night before, who said profits during the same period jumped $400 million.

During conference calls with analysts and reporters, Dell officials said each of the company’s business units saw revenue growth, with commercial-focused products like servers, storage and networking garnering a 26 percent jump in revenue.

However, Dell — now the world’s third-largest PC vendor, behind HP and Acer — didn’t see the same kind of bump from the recovery of consumer sales that competitors got, despite such drivers as Microsoft’s late-2009 introduction of its Windows 7 operating system and the promise of new processors from the likes of Intel and Advanced Micro Devices. And while HP announced market-share gains in PCs, Dell didn’t see such improvement.

Overall, Dell revenue in the fourth quarter hit $14.9 billion, an 11 percent increase over the same period last year. However, net income was $334 million, a 5 percent decline over the $351 million reported for the fourth quarter of 2008.

During the conference calls, CEO Michael Dell and Chief Financial Officer Brian Gladden were peppered with questions about the company’s relatively low gross profit margins, particularly in light of the revenue and shipment gains in the business segments.

Both Dell executives said most of problems were attributable to the consumer business, where they didn’t see the same increase in demand as on the commercial side, and where, like other vendors, Dell was squeezed by high prices for components such as DRAM (dynamic RAM). The company also was hurt by increased sales of less-profitable PCs during the holiday season.

“We were disappointed by the margins,” Dell said.

However, he cautioned against reading too much into the numbers, pointing out that the company was still working to make changes to help with the bottom line, from simplifying the product portfolio to reducing expenses in the supply chain. Such efforts will continue over the next few quarters, Dell said.

It’s all part of a larger push by Dell since he returned as CEO in 2007. Since that time, he has cut more than 10,000 jobs — though he added 24,000 with the $3.9 billion purchase in late 2009 of Perot Systems — and has outsourced much of the company’s manufacturing, which has allowed some facilities to be shut down. Dell has stated that he hopes to have reduced costs by $4 billion by the end of 2011.

In addition, the company is continuing its efforts on the commercial side to move into higher-margin sectors with longer recurring revenue streams, he said. The commercial space is an important one for Dell, given that it accounts for the bulk of revenues for the company.

Dell officials for more than a year have been pushing to diversify the company beyond its PC roots. That includes not only expanding such commercial businesses as its services and data center solutions units, but also moving into such consumer areas as smartphones, with its Dell Mini 3.

But it was in the commercial space where Dell saw its greatest strength in the quarter. Total commercial revenue grew 11 percent year over year, and all segments showed increased demand. Sales of enterprise systems grew 17 percent over the third quarter of 2009, large enterprise revenue was up 8 percent over the same period last year, and small and midsize business revenue was up 10 percent.

Dell and Gladden also spoke of the company’s ongoing push to broaden its commercial reach, aided by some past acquisitions, including EqualLogic’s storage business and more recently Perot, which is now Dell’s services business.

Dell said he will continue looking to acquisitions to build up the company’s portfolio in data center solutions and other areas. A case in point was Dell’s announcement Feb. 11 that it is buying virtualization software maker Kace Networks.

Both Dell and Gladden echoed what executives of other OEMs have said, namely that they expect to see business demand continue to pick up as 2010 rolls along, driven by aging hardware and software and the demand for such products as Windows 7 and the upcoming eight-core “Nehalem EX” Xeon chip from Intel.

“As we go to Nehalem EX, the ROI [for customers] just goes higher, and it becomes much more compelling,” Dell said. “The age of the installed base is significant and our customers are seeing a refresh as a productivity enabler.”

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