Dell confirms disappointing Q3 results

Dell Inc.’s third-quarter revenue and earnings came in short of the company’s original expectations, as it had warned last week.

Third-quarter revenue was US$13.9 billion, as compared to revenue of $12.5 billion in last year’s third quarter. Dell had originally expected revenue between $14.1 and $14.4 billion, but in an earnings warning last week the Round Rock, Texas, company blamed a slow quarter in its U.S. consumer business and its U.K. operations for dragging down results.

Net income for the quarter was $606 million, as compared to net income of $846 million last year. Dell was forced to take a one-time $442 million charge during this year’s quarter to account for a variety of problems, including the costs associated with replacing faulty capacitors on some of its OptiPlex desktops, layoffs in its Texas and U.K. offices, and, perhaps most surprisingly for a company known for its lean direct-selling operation, inventory write-offs.

“If you look at our history, we are not a company that takes charges, and we are not pleased about that,” said Kevin Rollins, Dell’s chief executive officer, on a conference call following the earnings announcement. He declined to confirm analyst reports that Dell laid off 1,000 employees during the quarter but said that number was “in the ballpark.”

Excluding the charge, earnings per share for the quarter were $0.39, as the company predicted last week. Before the earnings warning, Dell and financial analysts originally predicted earnings per share would fall between $0.39 and $0.41.

On a positive note, Dell continued to strengthen its services business, one of the company’s top priorities this year. Revenue from services increased by 36 percent to $1.2 billion in the quarter.

Storage revenue also was up sharply, with an increase of 35 percent compared to last year. However, services and storage make up a relatively small portion of Dell’s overall revenue, something the company is trying to change as it grows.

Desktop PCs are still Dell’s biggest sellers, and revenue in that category dropped two percent compared to last year. PC buyers are continuing to shift to notebooks, Rollins said. Revenue in Dell’s mobility category, which includes notebooks and personal digital assistants, grew by 14 percent.

Last quarter, Dell’s PC business suffered as the company sold more PCs than it had expected to at the low end of the market, which is less profitable. The company made steps toward improving that situation in this quarter with the launch of high-end products and services geared around its XPS brand, which should help Dell improve its profit in the coming quarters, Rollins said.

The company’s printer business crossed a milestone during the third quarter, becoming slightly profitable on strong sales of ink and toner cartridges, Rollins said. Those profits should increase in the fourth quarter as Dell continues to increase its market share on the enterprise end of the printer market, he said.

Dell’s server business saw a 16 percent increase in revenue and a 21 percent increase in shipments during the third quarter. The company is looking forward to the next iteration of Intel Corp.’s dual-core chips, which will introduce new features such as hardware virtualization, new memory technologies and improved I/O technology, Dell said. Those chips will appear in the ninth generation of Dell’s server products when they are released in the first half of next year, he said.

The company’s fortunes varied in different regions of the world during the third quarter. Revenue from its U.S. consumer business fell two percent compared to last year, but revenue from the Americas region overall increased by 10 percent. In Europe, the Middle East, and Africa, revenue grew 19 percent but operating income fell by five percent.

Coming off an exceptionally strong second quarter in Asia, Dell did not do as well during the third quarter, according to market analyst IDC. The company’s market share in Asia, excluding Japan, fell by 1 percentage point from the second quarter to 7.8 percent. However, that figure still represented a 34 percent improvement over the company’s market share during the same period last year, it said.

The omission of Japan from these numbers is significant: Historically, Japan has been Dell’s biggest market in Asia and the company includes Japanese sales when it breaks out results for Asia.

Revenue in the entire region grew 20 percent compared to last year, Rollins said. In the closely watched Chinese market, revenue grew 29 percent while unit shipments grew 46 percent, he said.

Compared to the second quarter, the third quarter was definitely tougher for Dell in China, said Bryan Ma, associate director of personal systems research at IDC. For example, the company missed out on a couple of major education projects, Ma said.

In addition, the president of Dell’s Chinese operations announced his resignation at the end of October. That has led some observers to ask whether his departure was related to the company’s performance in China, specifically whether the company is missing out on fast-growing demand for low-end desktop PCs in smaller towns and cities. However, there’s little evidence to support that theory.

“Everyone is very focused on the low end, and there is a perception that Dell is missing out,” Ma said. However, Dell is more focused now on winning high-end customers that can boost its bottom line rather than on taking market share, he said.

Rollins reiterated the company’s commitment to direct selling in China and characterized the departure of Foo Piau Phang as amicable.

Looking ahead to the fourth quarter, Dell expects revenue of $14.6 billion to $15 billion. This will cause the company to fall short of the $60 billion target for annual revenue that it predicted in April, and it raises questions about Dell’s stated plans to hit $80 billion in revenue by 2008 or 2009. On Thursday, Rollins declined to attach a specific timeframe to the $80 billion goal.

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