Servers, Storage, Laptops and Weak Dollars Buoy Dell in Q1

Published: June 5, 2008

by Timothy Prickett Morgan

Computer maker Dell is trying to give Wall Street, investors, and customers the impression that it is on the mend, and the weak U.S. dollar is certainly doing its part to make that job a little easier than it might otherwise be. Somewhat revived server sales in the first fiscal quarter as well as the industry trend to upgrade to laptops among companies and consumers alike also did their part to give Dell some revenue growth, and share buybacks helped push up earnings per share, too. The company was sitting on $8.5 billion in cash, but has some pretty big bills to pay, too, from running the business--accounts payable was $4.9 billion larger than accounts receivables.

Dell has a quirky fiscal year, with the first quarter for 2009 ending in the first week of May in the prior calendar year. (Yes, this is silly, but companies often keep weird fiscal years because they want to make comparisons more difficult across the industry and to get their own day in the papers to boot.) This year, the quarter ended on May 2, and the company's sales rose by 9 percent to $16.1 billion. Net income for the quarter rose by a slower 4 percent rate to $784 million, but thanks to share buybacks, the company was able to push earnings per share up 12 percent to 38 cents a pop.

By category, Dell's laptop business is the revenue leader, with $4.9 billion in sales, up 22 percent. Desktop PCs come in second, at $4.7 billion, but declined in the quarter. Servers and networking gear accounted for $1.65 billion in sales, up a modest 4 percent, while storage sales (thanks in part to acquisitions) rose by 15 percent to $631 million in Q1. Software and other peripherals accounted for $2.74 billion in sales, up 17 percent, and services sales rose by 13 percent to $1.45 billion.

By geography, Dell breaks its commercial business down into three big geos and then lumps all of its consumer sales into one global unit. Across all of these product lines, Dell shopped 11 million units, up 21.7 percent. In the Americas region, commercial sales only rose by 6/10ths of a percent to $7.3 billion, and operating income declined by 8.7 percent to $588 million, mainly because the U.S. unit has to absorb acquisition costs. Server shipments rose by 20 percent in this region, according to Don Carty, Dell's chief financial officer, who spoke to Wall Street analysts about the quarter last week, with laptop shipments up 11 percent and desktops off 2 percent.

In Europe, the Middle East, and Africa, Dell's sales in Q1 to commercial entities rose by 14.7 percent to $3.81 billion, with unit shipments up 30 percent, while sales in Asia/Pacific (including Japan) rose by 18.6 percent to just over $2 billion, driven by 31 percent unit shipment growth. Operating income in the EMEA region fell by 21.6 percent to $221 million, while in Asia/Pacific, operating income increased by 52.3 percent to $131 million. Consumer sales worldwide rose by 20.5 percent to $2.95 billion, with operating incomes almost doubling to $35 million. Dell, like other IT suppliers, is most keen on getting sales in the so-called BRIC Plus countries, which means fast-growing Brazil, Russia, India, and China plus Mexico, Colombia, Argentina, Turkey, Ukraine, South Africa, Thailand, Indonesia, Philippines, Vietnam. Dell's shipments in the BRIC countries rose by 73 percent, in aggregate, and sales rose by 58 percent. So growth in these areas, coupled with the fact that the weak U.S. dollar amplifies these sales when they are brought back to Round Rock, has been a saving grace for Dell and, indeed, other IT suppliers in the past several years.

Last June, Dell announced that it was cutting around 10 percent of its workforce--about 8,800 employees--to get costs in better alignment with revenues, and therefore having profits. Dell removed 3,700 employees in the first quarter of fiscal 2009, and has eliminated 7,000 jobs thus far. (But it has put another 2,700 employees on the payroll through several acquisitions in the past year, too.) Dell ended the quarter with 79,900 employees and 4,700 temporary contractors.

Carty said in the call that Dell was seeing softness in the United States, and the hesitancy among some global companies and large enterprises within North America to plunk down big hunks of money on IT projects was now spreading to other areas--notably Dell's core small and medium business market. "We are seeing conservatism in IT spending in the United States," Carty explained, "and that has extended modestly from global and large customers into public, small and medium business accounts and we expect that to continue through the summer, particularly as many of these customer segments are seasonally slower."

Dell also announced that Carty was stepping down as chief financial officer, and would be replaced by Brian Gladden, formerly chief financial executive officer SABIC Innovative Plastics Holding and a long-time executive in General Electric's GE Plastic unit. Carty has been a Dell board member for years and is vice chairman of the board, in fact, and will continue in that role.

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