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8/16/2013
02:02 PM
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Dell's Ugly Earnings: 5 Takeaways

Dell posted an undeniably lousy quarter -- but the company's poor performance could actually bolster CEO Michael Dell's buyout plans.

On Thursday, Dell announced an undisputedly ugly earnings report that included a 72% year-over-year drop in profits.

To most companies, this sort of performance would be perceived as a disaster, flat out. But Dell is in a unique position, nearing the end of CEO and founder Michael Dell's six-month quest to take the company private. As a result, the earnings speak not only to Dell's current competitive prospects, but also to whether Michael Dell will be in charge long enough to turn things around.

What do the company's financial statements reveal about these topics? Here are five key takeaways from Dell's rocky earnings.

1. Dell slightly outperformed expectations.

Dell recorded $14.5 billion in revenue in its second fiscal quarter, which is actually basically flat compared to the same period in 2012. This exceeded analyst estimates, which were closer to $14.2 billion. Even though more than three-quarters of Dell's profits evaporated relative to last year, its $204 million in net income translated to 25 cents per share, one cent more than expected, according to Thomson Reuters.

[ For the latest on Dell's bid to go private, see Michael Dell Sweetens Buyout Bid. ]

2. Dell is selling more PCs but is still getting killed in the PC market.

In July, research firms Gartner and IDC released separate reports that suggested Dell's PC sales had begun to pick up. Indeed, Dell's computer business accounted for $9.1 billion, a 5% year-over-year drop that's not nearly as bad as it could have been, given the overall market. Unfortunately, Dell maintained its PC business largely by cutting prices. This tactic led to lower margins, and to overall profit of only $205 million. More than half of Dell's revenue comes from PCs and accessories.

3. The Enterprise Solutions Group is making progress, but not fast enough to compensate for the PC's business free-fall.

Dell's reliance on the floundering PC market is due in part to the fact that the company has largely missed out on the move toward mobile devices. That said, Dell has spent the last several years expanding beyond its PC base, with billions spent to acquire various companies and technologies. Last December, Michael Dell declared that the effort had turned the company into an end-to-end enterprise service provider. That was before the PC market had fully unraveled, however. The CEO now wants to take the company private to further develop this persona.

The Enterprise Solutions Group was the lone bright spot in the earnings report. Its revenue was $3.3 billion, up 8% from a year ago. Dell noted strong sales of networking hardware and server equipment. The company singled out demand for hyper-scale products, a new category of highly scalable data center technologies in which Dell has been an early leader.

Still, the Enterprise Solutions Group also testified to Dell's challenges. Though revenue was up, income slid 9%, to $137 million. That means Dell's enterprise business generated even less profit than its struggling PC business.

4. Dell's software business is coming along more slowly.

Software is another important element of Michael Dell's plan to make Dell a major enterprise services player. But unlike the Enterprise Solutions Group, which showed progress, the company's software projects are still finding their way. Dell's software business posted a $62 million operating loss. The company said it is working to enhance its software capabilities with investments that increase R&D and sales capacity.

5. Increases Michael Dell's chance of winning.

All in all, this was the kind of earnings report that shows why Michael Dell wants to take the company private in the first place. The company has valuable assets, but a turnaround is going to take time. Most investors won't have the patience to endure additional quarters like this one, and Michael Dell doesn't want to deal with oversight and scrutiny as he retools the company.

Still, Dell's plan has been challenged by activist investor Carl Icahn, who thinks the CEO's buyout offer cheats investors out of future profits. After months of sniping and a recent series of maneuvers that included a sweetened offer and a change in the shareholder voting procedures, Michael Dell finally seems poised for victory.

Icahn is still fighting Michael Dell in court, but for many investors, the earnings report is probably the last straw.

There are several clear reasons for shareholders to accept the buyout, according to a research note written by Cindy Shaw, managing director at investment analytics firm Discern. She noted that declining enterprise profits reinforce doubts that Dell can compete in a crowded market, and that the company's falling PC sales and struggles in the mobile market are also significant concerns. Discern expects Dell to go private, but says if it doesn't, the company's stock -- which was trading around $13.76 on Friday -- could fall below $10.

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StacyG488
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StacyG488,
User Rank: Apprentice
8/26/2013 | 9:23:03 PM
re: Dell's Ugly Earnings: 5 Takeaways
It's not Dell, it's that the company's focus is on on a product that people simply don't buy any longer. How can Dell out innovate Google or Apple? or out market IBM and SalesForce.com? Until they can answer that question the company will continue to suffer.
ANON1234369798209
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ANON1234369798209,
User Rank: Apprentice
8/20/2013 | 2:52:17 PM
re: Dell's Ugly Earnings: 5 Takeaways
As a former employee (in the 90s), I can say that Michael isn't a bad manager, but a poor judge of executive management. His employees were always top notch and gave 100%, but the growth in the 90s led to the hiring of terrible executives from defunct companies. This changed the culture and provided the stagnation that threatens corporate solvency today. Perhaps the company needs to be private to shift gears, but it seems to be more about transforming the culture than the business model (see IBM with Gerstner)...
melgross
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melgross,
User Rank: Ninja
8/17/2013 | 7:32:56 PM
re: Dell's Ugly Earnings: 5 Takeaways
It's not likely that Icahn is doing this to prevent companies from going private. He sees an opportunity here for himself, and that's why he's doing it. This is the same as his recent purchase of $1 billion of Apple shares, where he's going to try to persuade Apple to purchase a total of $150 billion in stock, something he will fail in.
jries921
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jries921,
User Rank: Ninja
8/17/2013 | 6:27:40 PM
re: Dell's Ugly Earnings: 5 Takeaways
I agree that the news actually strengthens Mr. Dell's case for taking the company priviate, but Mr. Icahn makes his money as a stock speculator and "activist shareholder" (aka corporate raider), so the last thing he wants is a wave of large publicly traded corporations going private; ergo, it's in his interest to make it as inconvenient and expensive as possible for Mr. Dell and his partners to carry out their plans, lest other publicly traded corporations be encouraged to follow their example.

Carl Icahn isn't going to give up unless he's bought off, loses the last appeal, or it becomes ruinously expensive to keep up the fight.
melgross
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melgross,
User Rank: Ninja
8/17/2013 | 6:21:23 PM
re: Dell's Ugly Earnings: 5 Takeaways
A number of us have been asking the same question. Mr. Dell, and his management team should have been removed from running the company while this process is being worked out. It's certainly to his advantage to make the company look as bad as possible during the attempts to buy it out.

The problem is that the continued poor decision making, which we've been seeing Mr. Dell make since he came back, makes it difficult to show that anything happening now is by design rather than by, well, continued poor decision making. He's clearly not capable of running the company.
melgross
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melgross,
User Rank: Ninja
8/17/2013 | 5:58:11 PM
re: Dell's Ugly Earnings: 5 Takeaways
But what does that mean, exactly? Do they continue to rely on Microsoft for the OS, because of their business dealings with them? If so, the outcome won't change.

If they make Android tablets they will just become another Android licensee, with no guarantee that sales will be any better than any number of secondary players. And with most of those players, we have to question whether profits are to be had in that business at those low prices, with bot Amazon and Google stating that profits aren't of interest to them in actual tablet sales.

Other manufacturers can't look at profits from their hardware in such a cavalier fashion, as they have no large ecosystem from which to attempt to recover some profits from (though its debatable if Amazon will ever profit from their tablets in any way, once you crunch the numbers).

Going private does nothing, really. It limits their going and getting lines of credit. It limits their ability to buy companies they think are useful to them, and it certainly doesn't improve the poor management skills Mr. Dell has. In reality, all it does is to put the continued decline of Dell behind closed doors.
Cara Latham
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Cara Latham,
User Rank: Apprentice
8/17/2013 | 2:43:12 AM
re: Dell's Ugly Earnings: 5 Takeaways
I have to agree with both of you. As a user of both a MacBook and an iMac myself, I haven't had to replace either in a very long time. I purchased my iMac in 2006, and the only thing I've had to replace on it since then was a $90 power supply part.

Perhaps if Dell can come up with technology and hardware that is as reliable and durable, when it comes time for consumers to make a purchase, they will consider it. But I don't see people rushing to buy new PCs in droves. I think the drop will stabilize, but sales will never return to the levels they once were.
D. Henschen
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D. Henschen,
User Rank: Author
8/16/2013 | 8:43:31 PM
re: Dell's Ugly Earnings: 5 Takeaways
So Dell (the person and the company) has good reason to sandbag results to promote the go-private plan? I was never a fan of Icahn and his ilk, but maybe there's a place for such activists. Good thing being an editor of a tech publication prevents me from investing in technology companies as a matter of policy. I have one ETF that contains shares of every tech stock out there, but I can't directly invest in (or short) companies that I personally cover or that InformationWeek covers.
Michael Endler
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Michael Endler,
User Rank: Author
8/16/2013 | 7:05:56 PM
re: Dell's Ugly Earnings: 5 Takeaways
I think you have a good point. People are delaying PC purchases because a) older machines are still "good enough"; b) tablets are cheap, more than capable for most things, and even better than laptops in some cases. But yeah, I'd rather have a MacBook Pro than any iOS, Windows RT or Android tablet in existence. At some point, I think it will stabilize. But I don't think it will ever be as big as it used to be.
Laurianne
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Laurianne,
User Rank: Author
8/16/2013 | 7:05:05 PM
re: Dell's Ugly Earnings: 5 Takeaways
I can't imagine Michael Dell not playing hard in the mobile game once the company goes private. It's too important, services focus or no.
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