Private Dell mostly makes PCs – and its sales of those are down

Operating income down almost a third

Dell isn’t exactly in rude financial health as it marches ever closer to the $60bn+ acquisition of EMC – at least, judging by P&L accounts the privately-held Texan tech firm filed with the US SEC.

The mammoth Form s-4 is supposed to paint a painfully honest picture of the businesses current position and the potential risks of merging months before it takes place (May to October).

But Dell, which hasn’t detailed its results publicly since being taken private two and a half years ago, revealed sales in the year ended 31 January 2016 were down across most of its divisions.

Net sales dropped six per cent year-on-year to $54.88bn, and of note is the size of Dell’s client devices business - despite its best effort, PCs sales accounted for a $35.8bn chunk of revenue, down nine per cent.

Commercial PCs generated $21.29bn, down eleven per cent, and consumer PCs fell seven per cent to $9.16bn. Third party related software and after point-of-sale peripherals dropped six per cent to $5.4bn.

Dell said “lower demand” and “competitive pricing pressure” hit the top line, and there was a Windows XP fresh hole in the number for fiscal ’16.

Operating income crashed 31 per cent to $1.4bn due “challenging economic conditions, competitive pressures and a strong US dollar that impacted our ability to adjust pricing”. Operating expenses was up due to investments in the sales force and R&D increased too.

The Software Group was down nine per cent to $1.36bn, largely due to a decrease in system management wares that came off the back of "disruption from a realignment of our sales organisation".

The unit reported an operating loss of $1m versus $30m in the prior year, the improvement was based on lower operating expenses “primarily as a result of headcount reduction”.

Over at the Services division, turnover for fiscal ’16 fell five per cent to $2.84bn; infrastructure and cloud was down three per cent to $1.67bn and application and business process services shrank seven per cent to $1.163bn.

Dell said there was a “revenue run-off” from several large contracts was the blame for the sales slippage, and said operating profit of $123m from services “as we continued to optimise our cost structure and automate our delivery process”.

Only the Enterprise Group reported visible progress as sales edged up two per cent to $14.97bn; server and networking jumped three per cent to $12.76bn; storage fell five per cent to $2.217bn.

Server shipments were flat indicating a richer mix of higher margin gear. As for storage, presumably, the portfolio will be chocker block with EMC kit when the deed is done.

Operating income fell 14 per cent to $1.05bn based on “challenging pricing dynamics, including competitive pressures and the strong US dollar”. Dell said it was unable to raise pricing, given the damp demand, that would have allowed it to offset higher costs of richer configurations.

Not only is Dell still heavily dependent on PCs – 65 per cent of revenues in fiscal ’16 – but a little less than half of its business, $27.42bn, is done in the US, versus $27.46bn in “foreign” countries. The split was in favour of overseas operations in the prior financial years ($30bn vs $28.7bn).

Operating expenses came in at $10.21bn, down four per cent. Total operating loss was $383m compared to $422m, and net loss improved to $1.1bn from $1.2bn. Operating cash flow was down to $2.2bn from $2.6bn in the previous twelve months.

Presumably Big Mickey D, CEO at Dell, has some tricks up his sleeve to make costs disappear when he takes over EMC because the company is borrowing billions to do the deal, especially when the PC market is in the doldrums. Otherwise, it is not clear – based on these numbers – how he’ll ever pay back those loans.

Dell is believed to be close to offloading Perot Systems and has a list of other firms in its stables that could follow suit, including Quest Software and Sonicwall.

We suspect Dell/EMC will be a public entity again once the challenging integration is done and dusted. If the company had already merged in the financial year that Dell just outlined, it’d be a $76.76bn beast that would have made an operating loss of $2.78bn. ®

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