Dell Reports 3Q Results Below Estimates, Sees Slow Growth

As well, the Round Rock, Tex., PC maker founded by Michael Dell nearly 30 years ago, warned continued operations will be rough.

The company reported operating earnings of only 39 cents a share, compared with analyst estimates of 40 cents, or 28 percent below the year-earlier amount. Revenue fell 11 percent to $13.7 billion, compared with expectations as high as $13.91 billion.

On a net basis, Dell said net income plunged 47 percent to $475 million, or 27 cents a share, from $893 million, or 49 cents, a year ago.

CFO Brian Gladden said the company performed well in a difficult global IT spending environment.” He and CEO Michael Dell are expected to brief analysts later on Thursday.

For the current quarter, the company said it expects revenue growth of only 2 percent to 5 percent, with full-year operating earnings of $1.70 a share.

Dell shares fell 16 cents to $9.40 after the announcement.

In the past, Michael Dell, 47,  was the guy to sell you a PC or laptop by mail, offering you just what you wanted over the phone, with an industry standard box that was cheaper than the competition.

Now he'll still sell you a PC or laptop, but he'll also offer your business software, security and storage products that compete with offerings from his bigger rival, Hewlett-Packard Co. (NYSE: HPQ), the top computer maker and now the No. 2 PC maker.

For the first time, China's Lenovo Group (Pink: LNVGY) has displaced U.S. companies as the No. 1 PC vendor.

But does the Round Rock, Tex.-based company's strategy work? Investors clearly don't think so yet. So far this year, Dell shares have given back 34 percent of their value; for the past 52 weeks, the loss is 37 percent.

Analysts polled by Thompson Reuters expected Dell to report third-quarter earnings to fall as well as revenue. They were correct.

“Dell's fighting an uphill battle,” said Steve Milunovich, analyst with UBS. It's fighting an environment with laggard PC demand coupled with new threats from Lenovo, while trying to implement its new service model.

Even now, about 50 percent of Dell revenue comes from PC sales, the analyst said, a weight on earnings. Gross margins in PCs and laptops are paper-thin, with those for storage, services and software far fatter.

With a “neutral” rating on Dell shares and a price target of $9.29, the UBS analyst wants to see how the company meets new competition from its partner, Microsoft Corp. (Nasdaq: MSFT), the top software company, which is now shipping its Surface tablet against several Ultrabook-based laptops from Dell as well as a tablet based on Windows 8 RT.

Meanwhile, Dell's servers have “caught up” with those from HP and services are catching on.

Over the past five years, Dell has acquired a score of companies, including the second computer services founded by two-time presidential candidate H. Ross Perot (Perot Systems); in the third quarter it completed the $2.5 billion purchase of Quest Software, a specialist in management systems.

Milunovich said the gamble on the new, upscale Dell is at “an inflection point” now.

Meanwhile, analyst Shaq Wu of Sterne Agee is also mixed on Dell. Also with a “neutral” view on the shares, Wu doesn't have a price target. He suggested the company would report results that beat expectations, issue a bullish forecast and enjoy a rally in the shares.

The company's fourth quarter, which ends in January, traditionally is its strongest, with sales for consumers and business peaking. Microsoft Windows 8 is also expected to trigger a new round of purchases that may have been deferred in anticipation.

Where's the silver lining in the new strategy?

Wu sees servers sold to enterprises accounting for about 16 percent of revenue with services accounting for another 15 percent. As well, sales to consumers now amount to only about 18 percent of revenue, with about 60 percent to large and small businesses, with the remainder to the public, or government sector.

“Dell's in a tough fundamental position,” Wu said, because it's under pressure from Lenovo as well as Taiwan's Acer Group (Taipei: 2353), as well as Microsoft and even Google (Nasdaq: GOOG), now selling its Nexus tablet and Motorola smartphones.

Shares of Dell closed at $9.56, down 2 cents, in Thursday trading. Their 52-week high was $18.36 and the low $9.11.