Investors pummeled Dell stocks in after-hours trading after the company reported significant year-over-year declines in revenue and earnings for its fiscal third quarter 2010, which ended October 3.1
Dell's business took a hit across the board, with the drop in sales from its large enterprise business leading the way. Dell officials, however, said the fact that business was up compared to the previous quarter is a sign of a turnaround.
Dell on Thursday reported total revenue for its third fiscal quarter 2010 of $12.9 billion, down about 15 percent compared to the $15.2 billion the company reported in the third fiscal quarter of 2009.
Dell also reported income of $337 million, or 17 cents per share, down 54 percent when compared to the $727 million, or 37 cents per share, reported last year.
Investors reacted to the news, which was released after the market close, by driving Dell's share prices down in after-hours trading. Before the news, Dell's share prices had fallen about 19 cents per share to $15.87, but in after-hours trading share prices fell to the $14.90-range per share a couple hours after the market closed.
The 15 percent drop in total revenue from last year came as Dell saw its total shipments drop 5 percent during that time.
Dell's large enterprise business caused the biggest share of the fall in total revenue. Dell reported large enterprise business revenue fell 23 percent compared to last year to $3.4 billion as unit shipments fell 24 percent.
The company's SMB situation was almost as bad, with total revenue from this part of the market falling 19 percent compared to last year to $3.0 billion.
Dell's consumer business fared a bit better, with total revenue falling 10 percent to about $2.8 billion.
Meanwhile, Dell's public sector business slipped 7 percent year-over-year to $3.7 billion.
Dell's Perot Systems services business fell 12 percent to $629 million compared to last year, based on the separate financial results reported by Perot. Dell in September unveiled plans to acquire Perot for $3.9 billion.
Revenue for all of Dell's primary product lines fell year-over-year, although the rate of the revenue decrease was the lowest it has been for about one year.
Dell's desktop PC revenue fell 26 percent compared to last year to $3.0 billion thanks to a 15 percent drop in units shipped, while its mobile PC revenue fell 14 percent to $4.2 billion despite a 5 percent rise in shipments.
Server sales fell 6 percent over last year to $1.5 billion on a drop in shipments of 7 percent, Dell said.
The company's storage revenue fell 19 percent to $508 million despite a rise in sales of its EqualLogic storage products of 31 percent. Michael Dell, chairman and CEO of the company that bears his name, said the move towards more reliance on its EqualLogic line reflects a company shift towards relying more on its own intellectual property to capture improved professional services opportunities.
Dell's enhanced services business fell 9 percent to $1.2 billion, while deferred revenue from services grew 6 percent. Software and peripherals revenue fell 7 percent to $2.4 billion.
Brian Gladden, senior vice president and CFO, said during the conference call following the release of the third quarter financial results that orders for PCs were down in the last two weeks before the release of Windows 7.
"I wouldn't call it material enough to impact how you think coming into the fourth quarter," Gladden said in response to an analyst's question.
Michael Dell said he expects a PC refresh cycle to come, but not right away.
"I don't think it will occur all at once," Dell said. "But it will be a rolling introduction over the next 18 months. It will be a powerful cycle."
Dell declined to directly address the settlement of anti-trust actions between Intel and AMD earlier this month during which it was alleged that Intel used "special rebates" and other means to pressure top computer makers like Dell, Hewlett-Packard and IBM to exclude or drastically limit the use of AMD processors from roughly 2000 to 2006.
"It's really about the net cost of the components that matters," Dell said. "It's not the rebates. We negotiate the best costs for our components."
The company's mobile PC priority going forward will be more focused on notebook PCs and less on netbooks, Gladden said.
Dell prioritizes its efforts where the margins are, Gladden said. "And we can tell you, with netbooks, the margin opportunities are lower," he said.
Michael Dell said that one can expect the company to do more mergers going forward, although they probably will not be on the scale of its Perot acquisition.
"You shouldn't be surprised to see midrange acquisitions along the lines of what we have been talking about in terms of bringing best value to our customers," he said.
Looking forward, Dell said improvements in underlying market demand trends, including in the commercial business, have sustained themselves into the first part of the fourth quarter, and that a seasonal increase in holiday shopping should overcome the seasonal drop in public sector sales.
While a significant majority of commercial customers continue to defer purchases, the average installed base continues to age beyond historical norms, and so new technology introductions could push commercial customers to start upgrading IT assets starting in 2010, he said.