Dell Consumer Investments Hinder Quarterly Earnings

By Chris Preimesberger  |  Posted 2008-08-28 Print this article Print

Dell invested heavily to expand its nonenterprise market share in Europe and in various IT sectors and may have overextended itself in trying to set up retail outlets and woo consumers over to its laptops, desktops and peripherals. Dell revealed in its quarterly report that its fiscal second-quarter profit margins fell a full 17 percent from a year ago.

Dell, in its zeal to expand its nonenterprise market share in Europe and in various IT sectors, may have expended too much marketing energy and cash trying to set up retail outlets and woo consumers over to its laptops, desktops and peripherals.

Dell revealed in its quarterly report on Aug. 28
(link will expire in 30 days) that its fiscal second-quarter profit margins fell more than 17 percent from a year ago . Overall revenue, however, came in at $16.43 billion, up about 11 percent.

The drop-off in profit reflects what is happening in the sluggish macroeconomy. Most companies are seeing a general slowdown in IT buying and spending this summer. Some analysts saw the report as an indicator of things to come in the IT industry.

There was good news on the data storage side, where Dell continues to grow at a strong pace, earning $681 million this quarter, a full $50 million more than Q1.

Storage, however, still lags far behind the company's main businesses-desktop and laptop PCs and servers-and represents less than 15 percent of the company's income.

CEO and founder Michael Dell told a teleconference of analysts and journalists that its profit margins-which often are in the 30 to 50 percent range-were hurt by efforts to build out its consumer product lines and overseas markets, especially those in the EMEA (Europe, Middle Eastern and African) markets.

Dell himself told me a few months ago that about 85 percent of Dell's overall business was sales to other enterprises, and that the company intended to focus more of its energies on the consumer market. That's what the company is doing, and the upfront investments it made during the last year now are playing havoc with the company's bottom line.

Dell has invested a great deal in developing channels, retail presence and its consumer sales force, which certainly isn't inexpensive. Two years ago, Dell was virtually an all-direct-sales business, with few channel partners.

"Our enterprise business in Europe is doing quite well, but our consumer presence there is, in fact, very small," Dell told the conference attendees. "We know we need to build broader and stronger relationships with our partners there, and we will."

Chief Financial Officer Brian Gladden echoed Dell's comments, saying Dell's earnings were affected by "strategic actions" taken to expand in its global consumer business.

The company also has done this, Dell said, despite losing a total of about 1,500 employees due to attrition and cutbacks during the last year.

Dell stockholders and investors probably shouldn't worry too much about the Aug. 28 report, analyst Brian Babineau of Enterprise Strategy Group told me.

"In this climate, technology companies are trying to grow their businesses with a mind-set of getting as many customers as they can," Babineau said.

"In some cases, that means forgoing profit, as was the case with Dell. I am sure that they will solve the pricing and cost structure issues and get back on the path. In contrast, other companies had a tough time growing but remained profitable.

"And the ones that executed did both and they should be commended. EMC comes to mind as a good example [of getting back on the path to operating leverage]," Babineau said.

Chris Preimesberger Chris Preimesberger was named Editor-in-Chief of Features & Analysis at eWEEK in November 2011. Previously he served eWEEK as Senior Writer, covering a range of IT sectors that include data center systems, cloud computing, storage, virtualization, green IT, e-discovery and IT governance. His blog, Storage Station, is considered a go-to information source. Chris won a national Folio Award for magazine writing in November 2011 for a cover story on and CEO-founder Marc Benioff, and he has served as a judge for the SIIA Codie Awards since 2005. In previous IT journalism, Chris was a founding editor of both IT Manager's Journal and and was managing editor of Software Development magazine. His diverse resume also includes: sportswriter for the Los Angeles Daily News, covering NCAA and NBA basketball, television critic for the Palo Alto Times Tribune, and Sports Information Director at Stanford University. He has served as a correspondent for The Associated Press, covering Stanford and NCAA tournament basketball, since 1983. He has covered a number of major events, including the 1984 Democratic National Convention, a Presidential press conference at the White House in 1993, the Emmy Awards (three times), two Rose Bowls, the Fiesta Bowl, several NCAA men's and women's basketball tournaments, a Formula One Grand Prix auto race, a heavyweight boxing championship bout (Ali vs. Spinks, 1978), and the 1985 Super Bowl. A 1975 graduate of Pepperdine University in Malibu, Calif., Chris has won more than a dozen regional and national awards for his work. He and his wife, Rebecca, have four children and reside in Redwood City, Calif.Follow on Twitter: editingwhiz

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