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Dell's server, net bizzes do well, but PCs slammed as expected

Wannabe software unit loses money in fiscal Q1

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If Michael Dell and his partners had hoped to turn in a bad quarter to help justify the relatively low price the Dell & Friends consortium wants to pay to take the IT giant private, Dell's sales force in the enterprise server, networking, and services units did not do their part to help. The PC business did – but not as much as many might have expected.

Dell reported its financial results a week earlier than planned for the three months ended on May 3, because of all of the issues surrounding the company founder's buyout plan and a competing (and as yet not fully detailed) leveraged recapitalization plan that activist investor Carl Icahn has proposed.

In the first quarter of fiscal 2014, Dell's product sales were $10.9bn, down 5 per cent, and services revenues were up 6 per cent to $3.17bn. Total sales tallied $14.07bn, a drop of 2 points compared to the year-ago period. Thanks to aggressive price cutting in the PC business and issues with the software business that Dell, the company, has been trying to build over the past several years, net income in the quarter was off by 79 per cent to $130m.

The PC business continues to be a drain on Dell, but one it is trying to address by cutting prices on notebooks while at the same time cutting its production costs and ramping up tablets.

"The trajectory of the desktop business continues to improve," explained Brian Gladden, Dell's CFO, on a conference call with Wall Street analysts after the markets closed on Thursday. As for notebooks, Gladden said that "demand in this space continues to be pressured as users shift to alternative mobile platforms."

Across all platforms, Dell's End User Computing unit posted sales of $8.92bn, down 9 per cent year-on-year and a little bit less of a crash than the overall PC market experienced in roughly the same period. Operating income was down 65 per cent to $224m, so you can see that the price cutting slammed earnings in the PC business. Desktop and thin client revenues came to $3.27bn, down 2 per cent, and mobility sales (including notebooks and tablets) fell by 16 per cent to $3.62bn. Dell had another $2.03bn in peripheral and software sales related to end-user devices in the quarter, down 6 points.

When asked what Dell's priorities were with PCs, Gladden said that Dell was "not measuring the business one quarter at a time" and was focusing on growing it, gaining share, and cutting costs.

As for what affect the controversy surrounding the buyout and recapitalization plans might be having on Dell shoppers, Gladden conceded that the company was answering a lot of questions. "I think, in general, the customer base has been supportive of the company," Gladden said. "We have looked at it as a chance to spend more time with our customers, and in many cases it has resulted in more opportunity for the company."

The Enterprise Solutions Group, which makes and sells servers, storage, and networking, was the hero of the quarter, and improved its profitability, as well. But many will argue that this unit should be bringing more to the bottom line, just as they argued the same more than a decade ago when HP bought Compaq. It just never seems to work out, particularly with hyperscale data centers essentially not only dictating engineering but financial terms to companies such as Dell.

Dell lumps together servers, networking, and peripherals within the Enterprise Solutions Group, and sales for these products rose by 14 per cent in the quarter to $2.67bn. Storage, including flash, disk, and tape products, continues to have issues, with a 10 per cent drop in fiscal Q1 to $424m. Operating income across ESG came to $136m, an increase of 71 per cent compared to the year-ago period.

Speaking specifically of servers, Gladden said that the PowerEdge 12G machines using Xeon E5 processors from Intel, launched last year, have seen their average selling prices rise as customers move fatter workloads to x86 iron. The density-optimized and often custom machines that Dell's Data Center Solutions unit makes for hyperscale data center operators are also "growing quickly," but he declined to elaborate or give any specific metrics.

"The server business is in a good spot," said Gladden. "It is not a space where you see us trading price for growth."

The Software Group at Dell is still a work in progress. While revenues were up by a factor of seven thanks to acquisitions, the red ink got a lot deeper, with Dell reporting an operating loss of $85m in the quarter compared to a $6m operating loss a year ago. Dell expects the software unit to start contributing to earnings in the first quarter of fiscal 2015 (a year from now).

Dell's Services group continues to plug along. Support and deployment services generated $1.2bn in revenues in fiscal Q1, up 2 per cent, and infrastructure, cloud, and security services had an 11 per cent bump to $612m. Application and business process services brought in another $295m, 15 per cent lower than a year ago. Operating income for the Services group was $370m, up 10 per cent, making that group by far the most profitable part of the company at the moment.

Dell is once again not providing guidance because of the wheeling and dealing that is going on with the company. ®

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