Cost reduction translates into increased benefits for
Good news was recently announced by Dell as the IT company announced that its net income for the last quarter almost tripled, as Dell benefited from lower IT component costs and growth in some areas of its more profitable product lines.
Dell’s shares increased by 5% in extended trading, surpassing analysts’ estimates of adjusted net income, but slightly below revenue estimates. For Dell’s first three months ended April 29, Dell earned $945 million or approximately $0.49 per share, up from $341 million or $0.17 per share last year.
Excluding non-recurring items, Dell earned $0.55 per share, which easily exceeds Wall Street’s expectations. Analysts interviewed by FactSet estimated adjusted earnings at $0.43 per share. Revenues increased by only 1% to $15.02 billion, compared to $14.9 billion last year, which is lower than the $15.4 billion forecast. Products revenue remained stable at $12.1 billion and services revenue increased 6% to $3.0 billion.
Dell’s consumer section, which accounts for nearly 20% of the company’s sales, also fell 7% to $3.0 billion. Consumer demand also fell more than expected and, in an interview, Brian Gladden, CFO, attributed part of the cause to “the saturation of the consumer PC market in developed countries”. He also added that “even though tablet PCs still represent only a littel percent of the entire PC market, they clearly have an impact on consumer demand for traditional PCs”.
Revenues of large companies increased by 5% to $4.5 billion and those of small and medium-sized businesses by 7% to $3.8 billion. Public sector revenues, on the other hand, decreased by 2% to $3.8 billion. Dell experienced the strongest growth in terms of servers and networks. In this category, revenues increased 11% to $2.0 billion. Desktop PC sales fell 8% to $3.3 billion and mobile PC sales increased 3% to $4.7 billion.
Dell has worked hard to increase the proportion of server computers, data storage devices and technology consulting services sold. According to Mr. Dell, these sectors are more profitable than the company’s core PC business. However, compared to last year, most Dell product categories represented almost the same percentage of sales and computers for consumers, and businesses continued to represent more than half of Dell’s sales.
However, Dell’s gross margin, which is still an indicator of the effectiveness of Dell’s business, was 22.9%, higher than the 20.4% expected by Reuters analysts. Dell’s strategy of focusing on the most profitable business areas and reducing low-margin offerings is working extremely well, according to Gladden.
Andy Hargreaves, an analyst at Pacific Crest, says Dell’s gross margin is “impressive” and has said that “Dell should be able to maintain it for the time being”. Mr. Hargreaves also said: “They have the potential to maintain margins in the long term, but to do so, they must move towards more service-oriented companies.
Looking at the current quarter, Dell expects sales to increase by a single-digit percentage in the middle of the first quarter, slightly faster than its seasonal growth of 2 to 3%. Analysts expect about $16 billion. Dell continues to expect revenue growth of 5% to 9% for the full year, which involves a total of $64.6 billion to $67 billion with analysts expecting approximately $64.4 billion.
Dell shares increased by $0.86, or approximately 5.4%, to reach a total of $16.76 in extended trading. The stock ended up steadily declining from $0.10 to $15.90.