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Dell Posts Weak Earnings: Services Growth Slow Going

Dell's enterprise business showed growth this quarter, but not enough to overcome a steep decline in PC margins.

As expected, Dell on Thursday announced a year-over-year decline in quarterly revenue, earning 21 cents per share on sales of $14.1 billion. The performance was down from the 43 cents per share that the company's investors earned during the same period last year. It was also below the 35 cents per share Wall Street had expected before Dell abruptly decided to disclose its fiscal performance a week ahead of schedule.

The schedule shift triggered rumors that Dell's performance would be worse than expected, and that the soft earnings could serve CEO Michael Dell's attempts to take the company private. Half of that projection has some to pass, but it remains to be seen how the company's report will impact its buyout trajectory. Dell announced in February his intentions to take the company private by paying investors $13.65 per share. But progress has since been mired by counterproposals, the most recent of which involves a plan backed by investor Carl Icahn that would offer shareholders $12 a share in cash or stock. This approach would permit some investors to cut their losses while still keeping the company partially public.

Predictably, Dell's PC business was the biggest culprit in the weak earnings. The division's sales fell 9 percent but its operating margin was off 65%. Prior to the company's announcement, some had speculated that Dell sacrificed profits by slashing prices to stimulate device sales -- a theory the earnings report does not outright confirm but nonetheless supports.

[ Dell's weak earnings report was no surprise. Read Dell Earnings May Disappoint. ]

Dell's business-oriented divisions fared better. The Enterprise Solutions Group's revenue was up 10 percent, at $3.1 billion. Server and networking revenue increased but storage revenue was down. Dell Services grew 2 percent, meanwhile, driven by gains in infrastructure, cloud, and security-related revenue. Dell Software, the focal point of some of the company's biggest recent changes, posted an operating loss on revenue of just under $300 million.

Dell, which made its name building PCs for consumers, has spent the last several years redefining itself as an end-to-end software and services company. This transition has been hampered by, among other things, the PC market's historic decline. Dell continues to draw much of its revenue from computers, and the market's downturn has put pressure on the company to tip its balance sheets in favor of its newer, more enterprise-focused endeavors. Michael Dell believes this process will be most efficiently executed without Wall Street's distractions and regulations.

In an email interview conducted prior to the earnings report, IDC analyst Matt Eastwood said Dell faces challenges because "the PC business has come unglued faster than they thought it would and Dell needs PC revenue to invest in [its] business transformation." This difficulty is compounded because Dell's enterprise business has not scaled as quickly as hoped --"certainly not fast enough to offset the declines in the PC space," according to Eastwood.

Eastwood believes that Dell has accrued valuable enterprise assets but is still transitioning its sales model. The company "needs to make significant investments in [its] go-to-market capabilities," he said. "This is a transformation that is perhaps best completed outside the glare of Wall Street." He stated that Dell's sales professionals have relied on a transaction-oriented approach, and that the company needs to focus on relationships and margins, "particularly when the solutions are end-to-end and span multiple silos and decision makers."

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