Dell's 10 Percent Growth and Profit Drop Disappoints Wall Street

Published: March 4, 2008

by Timothy Prickett Morgan

It is tough to cut a break from Wall Street when you have been a darling so long, providing more sales, profits, and growth of both than other players in a market. Just ask IBM in the early 1990s, Sun Microsystems in the early 2000s, Hewlett-Packard a few years ago, and Dell right now.

Dell reported its fiscal fourth quarter and full fiscal 2008 financial results last week, and even though sales rose by 10 percent, to $15.9 billion, operating income in the quarter fell by 6 percent to $776 million and net income fell by 6 percent to $679 million. Ironically, Dell hit its long-time financial goal of breaking through the $60 billion barrier in fiscal 2008, with sales up 6 percent to $61.1 billion; net income rose by 14 percent for the year, to $2.95 billion. But the fact that sales in fiscal Q4 were lower than Wall Street consensus estimates and, more importantly, Dell's top brass said that caution among consumers might make the next few quarters a bit bumpy.

In the quarter ended February 1, Dell posted $4.9 billion in desktop PC sales, up 2 percent, and mobile PC sales of $4.8 billion, up 24 percent. Server and networking gear sales grew by an unimpressive 2 percent to $1.6 billion, and storage sales were up an equally uninspiring 2 percent to $600 million. "Product transitions and conservatism in the U.S. commercial segments did adversely affect growth in those product categories," explained Donald McCarty, Dell's new chief financial officer, in a call with Wall Street analysts.

Dell did a little better in services, with sales up 7 percent to $1.4 billion; software and peripheral sales in the quarter rose by 15 percent to $2.7 billion. On a geographical basis, Dell's sales in the Americas region rose by 8 percent to $9.5 billion, and sales in Europe rose by the same 8 percent to $4.2 billion. The Asia/Pacific region saved Dell's quarter, with sales up 28 percent to $2.3 billion. Operating income in the Americas region was slammed by restructuring costs, which contributed to the earnings drop in the fourth fiscal quarter.

For the fiscal 2008 year, Dell's desktop PC business was down 1 percent to $19.6 billion, while its mobile PC sales rose by 13 percent to $17.4 billion. Server and networking sales were up 12 percent, to $6.5 billion, and storage product sales rose by 8 percent to $2.4 billion. Services sales were weaker earlier on in fiscal 2008, and only rose by 5 percent to $5.3 billion during the 12 months; software and peripheral sales were up 10 percent to $9.9 billion.

Dell ended the fiscal year with $9.5 billion in cash and spent an astounding $4 billion buying back its own shares on the open market. Dell said it plans to spend at least $1 billion buying back its shares in the first quarter of fiscal 2009. (This stock purchasing cushions the blow on net earnings per share comparisons.) Dell has shed 3,200 jobs in the past eight months to help cut costs and obviously either needs to cut costs or grow sales to get profit growth tracking with sales growth again, much less outpacing it, consistently every quarter. For the year, Dell already did that in fiscal 2008. But Wall Street was a very long memory and remembers much larger double digit growth in years gone by.

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