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Dell confirms disappointing Q3 results

Down but definitely not out

After last weeks warning, Dell's third-quarter revenue and earnings have indeed come in short of the company's original expectations.

This year’s third-quarter revenue was $13.9bn (£7.99bn), compared to last year’s $12.5bn (£7.18bn) of the same period. Dell had hoped for a sum between $14.1 and $14.4bn (£8.27 billion). The loss was blamed on a slow quarter in its US consumer business and its UK operations for dragging down results.

Net income for the quarter was $606m (£348.43m), as compared to net income of $846m (£486m) last year. Dell had been forced to take a $442m (£254.23m) charge this quarter to account for costs associated with replacing faulty capacitors on some of its OptiPlex desktops, layoffs in its Texas and UK offices and, perhaps most surprisingly for a company known for its lean direct-selling operation, inventory write-offs.

"If you look at our history, we are not a company that takes charges, and we are not pleased about that", said Kevin Rollins, Dell CEO. He declined to confirm analyst reports that Dell laid off 1,000 employees during the quarter but said that number was "in the ballpark."

Excluding the charge, earnings per share for the quarter were $0.39 (£0.22). Dell financial analysts originally predicted earnings per share would fall between $0.39 and $0.41.

On a positive note, however, Dell has made good economic progress in strengthening its services business, one of the company's top priorities. Revenue from services increased by 36 percent to $1.2bn (£0.7bn) in the quarter.

Storage revenue was also up sharply, with an increase of 35 percent year on year. Nevertheless, services and storage only make up a relatively small portion of Dell's overall revenue — something the company is trying to change as it grows — but for the meantime cannot rescue the revenue losses alone.

Desktop PCs are still Dell's biggest sellers, and revenue in that category dropped two percent compared to last year. PC buyers are continuing to shift to notebooks. Revenue in Dell's mobility category, which includes notebooks and PDA’s, grew by 14 percent.

Last quarter, Dell's PC business suffered as the company sold more PCs than it had expected to at the low — and therefore the less profitable — end of the market. To this end, the company have launched high-end products and services geared around its XPS brand, which should help Dell improve its profit in the coming quarters.

The company's printer business crossed a milestone during the third quarter, becoming slightly profitable on strong sales of ink and toner cartridges. Those profits should increase in the fourth quarter as Dell continues to increase its market share on the enterprise end of the printer market.

Dell's server business saw a 16 percent increase in revenue and a 21 percent increase in shipments during the third quarter. The company is looking forward to the next iteration of Intel's dual-core chips, which will introduce new features such as hardware virtualization, new memory technologies and improved I/O technology. Those chips will appear in the ninth generation of Dell's server products when they are released in the first half of next year, he said.

The company's fortunes varied in different regions of the world during the third quarter. Revenue from its US consumer business fell two percent compared to last year, but revenue from the Americas region overall increased by 10 percent. In Europe, the Middle East, and Africa, revenue grew 19 percent, but operating income fell by five percent.

Despite an exceptionally strong second quarter in Asia, Dell didn’t do as well during the third quarter, according to market analyst IDC. The company's market share in Asia, excluding Japan, fell one percent from its second quarter score to 7.8 percent. However, that figure still represented a 34 percent improvement over the company's market share during the same period last year, it said.

The omission of Japan from these numbers is significant: Historically, Japan has been Dell's biggest market in Asia and the company includes Japanese sales when it breaks out results for Asia.

Revenue in the entire region grew 20 percent compared to last year, Rollins said. In the closely watched Chinese market, revenue grew 29 percent while unit shipments grew 46 percent.

Compared to the second quarter, the third quarter was tougher for Dell in China, said Bryan Ma, associate director of personal systems research at IDC. For instance, there were a couple of major education projects they missed out on.

In addition, the president of Dell's Chinese operations announced his resignation at the end of October. That has led some observers to ask whether his departure was related to the company's performance in China, specifically whether the company is missing out on fast-growing demand for low-end desktop PCs in smaller towns and cities. However, there's little evidence to support that theory.

"Everyone is very focused on the low end, and there is a perception that Dell is missing out", Ma said. However, Dell is more focused now on winning high-end customers that can boost its bottom line rather than on taking market share, he said.

Rollins reiterated the company's commitment to direct selling in China and characterized the departure of Foo Piau Phang as amicable.

Looking ahead to the fourth quarter, Dell expects revenue of $14.6bn to $15bn (£8.6bn). This will cause the company to fall short of the $60bn (£34.5bn) target for annual revenue that it predicted in April, and it raises questions about Dell's stated plans to hit $80bn (£46.01bn) in revenue by 2008 or 2009. Rollins declined to attach a specific timeframe to the $80bn goal.


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