Dell's Rollins Eyes Growth Despite Earnings Dip

Earnings declined in part because of the cost of replacing defective PCs, but the company sees plenty of opportunity for growth in storage, printers, and software and periperhals.
Growth opportunities for Dell remain strong despite an earnings setback in the third quarter, due in part to charges related to replacing faulty desktop PCs, according to Kevin Rollins, Dell president and CEO.

Specifically Rollins pointed to Dell's storage, printer, and software and peripherals businesses where the company holds single-digit market share positions compared to the more established 18% market share in Dell holds in PCs.

"We are disappointed we didn't reach our initial revenue target for the quarter, but we are very pleased with our ability to deliver industry-leading profitability, consistent growth and earnings, and a balanced P&L," Rollins said during a teleconference.

For the third quarter ended October 28, Dell reported net income of $606 million, or 25 cents per share, on revenue of $13.9 billion. That compares to net income of $846 million, or 33 cents per share, on revenue of $12.5 billion in the same period a year ago.

Dell issued an advisory last week that said its revenue would come in below its original target of $14.1 billion to $14.5 billion. The company also disclosed that it would take a charge of $442 million associated with the costs of repairing certain desktop PCs that used capacitors from a third-party vendor that failed to perform to specification. Rollins confirmed that the company had about 1,000 lay-offs during the quarter.

Rollins played down concerns that the company's historical growth rate is "decelerating."

"There is no deceleration because we're still growing," Rollins said. "The business this quarter grew at 11% and our guidance for the fourth quarter is in that range, which we believe is a very healthy growth rate for a company or our size and complexity."

Rollins noted that its services revenue has grown 36%, year over year, to $1.2 billion in the third quarter. In the same period, storage revenue grew 35%, software and peripherals grew 25%, server units grew 21%, and revenue outside the United States grew 20%.

For the fourth quarter, Rollins said Dell expects revenue of $14.6 billion to $15 billion, and earnings of 40 to 42 cents.

Even with revenue of $15 billion, the company would fall some $4 billion short of its early target of achieving revenue of $60 billion this fiscal year. But Rollins says the company still believes annual revenues of $80 billion are achievable in the future.

"We have not backed off on that $80 billion target," he said. "We have never set a firm data (to reaching the milestone). It's a strategic goal, and we believe we can achieve it."

Rollins said there has been no change in the company's position as an "all-Intel" supplier despite the company now offering packaged PC processors from Advanced Micro Devices Inc. on its website.

"We offering AMD products on the software and peripherals site for customers who want to buy them, but that's really the extent of it at this point," he said. "We look at opportunities all the time with technology, but this is a product customers wanted to buy on the software and peripherals site."

Dell reported that for the year to date, it has had net income of $2.56 billion, or $1.03 per share, on revenue of $40.7 billion. That compares to net income of $2.38 billion, or 92 cents per share, on revenue of $35.7 billion during the same three quarters a year ago.

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