High-Margin Products Propel Dell's 2Q Earnings As Sales Stagnate


Strength in enterprise servers and networking sales along with services gave Dell a big boost in profits for its second quarter despite a weak 1 percent year-over-year revenue growth.

However, economic factors and a shift in company resources from low-margin to high-margin products combined to cause Dell to significantly lower its full-year revenue projections, leading to a revolt by investors who heavily slammed the company's share price in after-hours trading.

Dell on Tuesday reported that revenue for its second fiscal 2012 quarter, which ended July 29, of $15.7 billion, up a mere 1 percent from the $15.5 billion the company reported in the same period of 2010.

This product revenue of $12.61 billion, a slight drop from the $12.65 billion reported last year, nearly canceled the impact of Dell's strengthening services revenue of $3.0 billion, up 6 percent from $2.9 billion.

Dell reported earnings for the quarter of $890 million, or 48 cents per share, up 63 percent over the $545 million, or 28 cents per share, it reported last year.

Looking forward, Dell said it expects its third quarter revenue to be flat with that of the second quarter, which is in line with seasonal expectations. However, Dell said its full fiscal year 2012 revenue is expected to grow between 1 percent and 5 percent, a significant drop in previous expectations of expected growth of 5 percent to 9 percent.

The drop in expectations stems from Dell's decision to focus more resources on higher-value solutions and away from lower-valued solutions, as well as what it termed an uncertain demand environment.

Investors reacted strongly to the lower revenue expectations, causing the company's share prices to plummet well over 7 percent several hours after-hours trading commenced.

Dell is moving away from reselling lower-value storage and other products, and is leaving some of its lower-margin retail business, said Brian Gladden, CFO.

That means the company is investing more resources on higher value-added products, Gladden said. "These spending increases are deliberate," he said.

In product terms, revenue across nearly all Dell's lines increased over last year. However there were two important exceptions.

Dell's storage revenue fell 20 percent over last year to $502 million. This includes a 62-percent drop in revenue from Dell's sales of EMC storage products, which used to form the lion's share of storage revenue before the strong partnership between the two companies broke down. This drop exceeded a 15-percent increase in sales of storage products based on Dell's own intellectual property, including its EqualLogic and Compellent lines.

"Most of the remaining EMC storage business has transitioned over to Dell technologies," Gladden said.

The other exception was Dell's PC business, which saw a 3-percent drop in revenue year-over-year to $3.9 billion.

Michael Dell, chairman and CEO of the company which bears his name, said in response to an analyst's question about Google's decision to acquire Motorola Mobility, that patents played a big part as Google looks to patents to enhance its ability to protect itself from efforts by competitors to sue it.

"It's sort of early to say," Dell said. "Obviously Google hasn't finalized the transaction."

Dell also said that his company's plans to offer a Windows 8 mobile phone are shaping up, and that it is also committed to Android. He also said that he sees no other viable alternatives to Apple in this market.