Weak Demand Is Hurting Dell - Barron's

Dell (DELL) posted quarterly profits last week and, for a change, the numbers were better than expected. Still, Barron's Eric J. Savitz isn't convinced that the PC giant's outlook is as sunny as some suggest.

Dell reported gross margin growth of nearly 1% from the previous quarter and 1.5% from the year before, and issued modestly upbeat guidance. CFO Brian Gladden expressed confidence that PC demand will start to pick up. However, Gladden admitted demand likely won't start to improve until 2010 and said it's too early to call an inflection point, despite demand stabilization.

Large sections of Dell's market remain weak, including its large-enterprise sector (demand fell 32% Y/Y), public-sector sales (-16% Y/Y) and small-and-medium-sized business sector (-29% Y/Y). Consumer sales were down 9% Y/Y. Sales and revenue for desktop computers both experienced double-digit falls from the year before. Notebook sales held steady but notebook revenue fell 21% as consumers opted for cheaper purchases.

Savitz notes that "even as Dell tries to position itself as a sophisticated corporate-solutions provider, to the Street it looks like a commodity-PC manufacturer in a world of still-tight IT budgets and tapped-out consumers snapping up low-end netbooks - a market in which Dell has little traction." This leaves little room to be bullish on Dell.

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More on Dell's Q2 beat:

• On Dell's Q2 earnings call, CEO Michael Dell told analysts he believes "a refresh cycle in commercial accounts will be a calendar 2010 story," saying he's confident "the significant majority of commercial customers are deferring purchases, and will accelerate IT spending to take advantage of technology driven productivity improvements."
• But Reuters columnist Eric Auchard warns investors not to count on a Dell refresh anytime soon. He notes its Q2 beat was fueled by one-time items, while the PC maker continues to shed market share. Before anyone can call a turnaround, Dell will need to transform its business model by focusing more on software and services revenue, and depending less on PC sales.

Comments

[Moon Kil Woong:]

Dell has been hurting Dell. Until they can come somewhere above 4th place on customer satisfaction why should you pay a premium for their brand name (or buy a Dell at all which is why their revenues are hemmoraging)? Their strategy is looking more like a cheap, cost cutting Chinese PC clone model than a brand name.

This is of course bad for America who must now depend on HP for made in America quality after IBM sold their PC business to Lenovo who is also losing its fans (not a big suprise since they have 0% innovation after IMB sold their business to them).

Aug 31 07:30 AM

[Zenfar:]

A great number of home user build their own PCs. Windows 7 will help a lot, it will make even PCs loaded with trial-ware run better than under Vista.

Aug 31 01:44 PM

[rkiss:]

Rachael - transform business model to focus on software? - I don't see that happening with Dell, unless I am missing something

Aug 31 05:32 PM