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Dell profit falls 47 percent hurt by slow tech spending

Dell profit falls 47 percent hurt by slow tech spending

By Reuters | Updated: 16 November 2012 10:20 IST

Dell Inc's third-quarter profit slid 47 percent, hurt by lower PC sales, weaker demand from large corporations and the shift to mobile computing.

Dell's consumer PC business is struggling as more and more consumers are using smartphones and tablets to do basic computing, and the company's corporate customers continue to defer spending due to the uncertain state of the economy.

The No. 3 personal computer maker warned that it "sees the challenging global macroeconomic environment continuing in the fourth quarter."

The company, once the world's top PC maker and a pioneer in computer supply chain management, is struggling to defend its market share against Asian rivals like Lenovo. It is trying to bolster growth by focusing on products and services to corporations.

The company said it expects revenue to grow as much as 5 percent in the current quarter.

"Our outlook for the quarter would be generally consistent with what we typically see in terms of a seasonal pickup," it said.

Dell said revenue in its fiscal third quarter fell 11 percent to $13.7 billion, slightly lower than the average analyst estimate of $13.89 billion according to Thomson Reuters I/B/E/S.

It posted net income of $475 million or 27 cents a share in the quarter, compared with $893 million or 49 cents a year earlier. Excluding certain items, it earned 39 cents a share, compared to an average forecast for 40 cents.

Chief Financial Officer Brian Gladden said in an interview that corporate customers continue to defer technology spending.

"It's not clear what's going to cause them to increase their spending in the short term, given the uncertainty in the economy," he said.

Dell's enterprise solutions revenue rose 3 percent to $4.8 billion, while server and networking revenue climbed 11 percent. In contrast, consumer revenue plummeted 23 percent to $2.5 billion, underscoring the plight of the broader PC market, and sales to large corporation declined 8 percent to $4.2 billion in the quarter.

Dell's "challenges are frankly the same as before - namely the tough macroeconomic environment and cannibalization from mobile devices using mobile operating systems from Apple and Google," Shaw Wu, analyst with Sterne Agee, said.

The consumer market is improving with the launch of the Windows 8 software from Microsoft, which has been designed with touchscreen devices and Internet-based computing in mind, Gladden said.

But sales of devices featuring the Windows 8 software have yet to ramp up while Microsoft is already in the market with its new Surface tablet computer, which may hurt PC sales.

Planning for "fiscal cliff"
Apart from the consumer, Dell's business customers have held back spending, which could be partly attributed to the looming fiscal cliff, Gladden said.

The fiscal cliff involves $600 billion in automatic tax hikes and spending cuts effective in early 2013 if U.S. lawmakers fail to agree on reducing the budget deficit.

The cuts could take a toll on consumer and government spending and cause the economy to stall.

"I would tell you that the behavior we are seeing from our customers today is actually driven by that uncertainty," Gladden said. "It's not like it's all going to happen overnight. It's affecting our business today."

Dell is ensuring that it has access to cash in case there is no congressional action.

"I would say there are several things we are doing from a planning standpoint, especially on the treasury side to ensure that we are in a position to have appropriate access to liquidity," Gladden said, adding that Dell is making sure it has access to lines of credit and commercial paper.

Dell shares fell 2.3 percent to $9.36 in after-market trade from its close of $9.56. The shares initially rose following the release of the results.

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