Notebook price war slams Dell's revenues, slashes profits

Servers and networking can't fill in the gaps

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A price war at the low-end of the notebook PC market where Dell has chosen not to participate plus a slump in PC sales where it is fighting to win buyers is wreaking havoc on Dell's financials.

In the company's third quarter of fiscal 2013 ended on November 2, consumer mobile PC revenues were down a staggering 30 per cent. The slump in Dell's PC biz is an issue that is larger than a delay caused by the launch of Windows 8, with which all PC makers have to contend. It is that Dell has decided not to compete at the low-end of the notebook biz where it can't make any dough.

Hence the mad dash in the past two years to put together an enterprise server, storage, networking, and related software stack through all of those acquisitions. And importantly, Wyse and Quest Software, which are two of the big deals Dell did this year as it blew $4.7bn.

These two companies give Dell a chance to chase higher-margin client virtualization projects, explained Steve Felice, Dell co-president and chief commercial officer, on a conference call with Wall Street analysts going over the numbers.

He said that this virtual client strategy drags along server, storage, and networking revenue as well. Dell believes this is better than trying to fight for no-margin notebook sales to consumers.

In the quarter, which had five days more this time around, Dell's revenues were off 11 percent, to $13.72bn, and net income was slashed by 47 per cent to $475m. Product sales fell by 13 per cent in the quarter, to $10.71bn, and services and software-related revenues were off 1 per cent to $3.01bn.

Don't blame servers, and don't blame networking. In the third quarter, Dell's server and networking sales were up 11 per cent to $2.32bn, bucking the trends in its other product lines. Dell CFO Brian Gladden said that its new PowerEdge 12G general-purpose machines, revamped earlier this year with Xeon E5 processors from Intel, represented two-thirds of overall server revenues and they had higher average selling prices and higher margins than prior PowerEdgies.

Hyperscale machines based on custom designs or the PowerEdge-C boxes derived from them also helped pump up server revenues in the quarter, but it is not clear how profitable such boxes are. But company founder and CEO Michael Dell said the Data Center Solutions unit had 26 per cent growth in the quarter, year-on-year, and that is much faster growth than the market at large and pretty impressive considering that Facebook is building its own servers, not buying Dell bespoke iron any more.

With 10 Gigabit Ethernet ports finally on servers, sales of 10GE switches are on the rise, and helped pushed Dell's networking revenues up 40 per cent in the quarter. (Dell does not provide a revenue breakout for servers separate from networking, but it should.)

You can blame Dell's storage business for some of the slump in fiscal Q3. Overall storage revenues were down 16 per cent to $386m, and everyone knows the compares are tough because the Dell-EMC partnership has been unwinding for over a year. But even ignoring this, Dell's own storage business, based on PowerVault, EqualLogic, and Compellent arrays, was off 3 per cent in the quarter, and Gladden said this was below expectations.

That said, CEO Dell piped up and said that the company has one customer that has bought a total of one exabyte of storage capacity from Dell. But that capacity was all installed in PowerEdge servers (presumably it is a clustered file system or a cloud) and does not show up in Dell's storage category but rather in its server category.

"The lines between servers and storage are getting blurred," Dell said.

"No kidding," said The Register Server Desk to The Register Storage Desk.

Dell's end user computing, software, and peripherals business took it on the chin, with mobile PC revenues off 26 per cent to $3.52bn, desktop PC sales down 8 per cent to $3.13bn, and software and peripheral sales down 11 per cent to $2.26bn. Gladden said that desktops held share but that mobile PCs were losing share and not meeting expectations.

Felice reassured Wall Street that Dell still believed in providing an end-to-end solution, from PCs to servers, and expected to see things pick up as Windows 8 ramped and Dell's touch-screen tablets got traction. And to make the business more profitable, Dell is working to trim $1bn in costs from the PC biz.

Dell Services had $2.11bn in sales, down 1 per cent, and is pruning some non-profitable accounts and boosting margins. Margins have been improving for the past six quarters, according to Michael Dell.

Application and business process outsourcing revenues were $326m, down 11 per cent. Infrastructure, cloud, and security products garnered $576m in revenues, down 5 per cent. Support and deployment services saw a 5 per cent bump to $1.21bn. Dell ended the quarter with a $15.8bn services backlog after signing $1.8bn in new contract signings.

What Dell is focused on is its Enterprise Solutions, Services, and Software grouping, which accounted for $4.8bn in revenues in the quarter, up 3 per cent. ES&S, which is roughly analogous to what IBM does for a living, is growing at the middle single digits this fiscal year and has an annualized run rate that approaches $20bn.

Dell also breaks down its sales by customer type. Large enterprises brought in $4.16bn in the third quarter, down 8 per cent, with many companies deferring discretionary purchases. Operating income fell much faster, by 27 per cent to $325m, which has to be troubling for the company.

The public sector – meaning governments and educational institutions – accounted for $3.82bn, down 11 per cent, and operating income fell twice as fast as that rate to $352m.

Small and medium businesses were off only 1 per cent, to $3.28bn, and SMBs "continue to be the most stable customer set for Dell," according to Felice. Still, operating income was down nearly 5 per cent in the SMB segment, so there is clearly some pricing pressure going on here.

Consumers are not so stable apparently, with revenues down 23 per cent to $2.46bn in the quarter. And the consumer biz posted an operating loss of $65m, compared to $99m in operating income a year ago. Dell might need to be in the traditional PC business to have sway in the supply chain, but it is sometimes not a lot of fun.

"We continue to see a challenging global macroeconomic and IT spending environment, which is clearly impacting our results," Gladden said as the call wound down. "We don't expect that to improve much in the fourth quarter." To that end, Dell expects a modest 2 to 5 per cent revenue bump sequentially in the fiscal fourth quarter, with somewhere between $180m and $200m revenue coming from the Quest unit that was just acquired.

Dell could also buy itself some revenue growth, with $11.3bn in cash and equivalents in the bank. The company has $9bn in debt, so it can't go totally crazy unless it wants to upset its balance sheet. But Dell picking up more software or cloudy businesses would not be at all surprising. ®

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