Dells Q2 a Mixed Blessing
Dells latest quarterly results offer a mixed report on its progress under the renewed leadership of CEO Michael Dell.
On one hand, the company had some good news to share. For the second financial quarter of 2007, the Round Rock, Texas company reported a net income of $733 million compared to the $502 million it reported the previous year. That was an improvement from 22 cents per share a year ago to 33 cents per share this year.
Revenue also increased 5 percent from $14.1 billion in the second quarter of 2006 to $14.7 billion this year. Dell even beat Wall Street estimates. Reuters estimates had called for revenues of $14.6 billion.
Although Dell executives did not host a conference call with analysts when the results were released Aug. 30, a statement reported that the company had taken advantage of low-cost components to help its bottom line. Dell also reported an improvement in its sales of enterprise hardware, such as its x86 servers and storage products.
That upswing in its business seemed to reflect the latest quarterly server survey by IDC, which found that Dells server shipments stood at about $1.5 billiona 20.2 percent increase from the second quarter of 2006.
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Part of that reflects Michael Dells change in the upper management of the company and a renewed focus on its traditional enterprise customers, said Charles Smulders, an analyst with Gartner.
"I think Michael Dells simplification of the management structure can been see as part of the payoff in terms of the companys server and storage results," Smulders said. "I think they really focused in on their relationship with Intel and they are using their direct sales force and making an impact."
But problems still persist. According to several analysts, Dells PC business is still lacking. In the last few months, the company has rolled out a series of improvements to both its desktop and notebook lines. In addition, Michael Dell introduced a series of PCs for small and midsize business called Vostro in July.
All those changes, however, were not enough to increase Dells PC sales.
According to an analysis by Technology Business Research, Dells notebook revenue for the quarter increased about 6.9 percent, but its overall PC shipments, including desktops, which are the companys essential product, were flat. At the same time, Hewlett-Packard reported notebook revenue for the second quarter of this year increased 54 percent, while desktop revenue grew 12 percent year-over-year.
The TBR report also found that while the company has made some notable improvements, Dells long-term problems remain.
"The company will bundle its PCs with peripherals and services and provide them through both direct and indirect sales channels, including VARs in the case of Vostro or retailers for its consumer PCs, in an effort to boost its unit shipments," the TBR report said.
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"However, we do not expect Dell to show its traditional double-digit quarterly PC unit shipment growth rates until its indirect sales strategy is well established. As such, for at least the next 12 months, our analysis indicates Dell will likely continue to face difficulties, including fluctuations in revenue and profitability," according to the same report.
In his analysis, Gartners Smulders said Dells two challenges are dealing with the low-cost notebook market, notably the type of laptops that Acer sells, and moving into the emerging markets, such as China, India and Russia.
"These are some of the reasons why Dell is in a long-term transformation," Smulders said. "The market is changing rapidly and Dell is trying to change. The problem now is to make sure the market doesnt move under your feet. The company is really trying to walk a tightrope."
Another challenge for Dell is the possibility that Acers acquisition of Gateway will cause prices to drop even further, especially if the new company becomes involved in a price war with HP.
However, there is the possibility that the Acer deal could create some new shelf space in stores like Best Buy for Dell if retailers decided that they need an additional vendor to keep customers happy and increase their own leverage with suppliers.
"Retailers like to have leverage over suppliers and the fact is that you might have one less supplier if Acer and Gateway consolidate," Smulders said. "These retailers might be looking to bring another vendor into their portfolios and that could benefit Dell."
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