CEO Michael Dell teed-up Thursday night's strong revenue performance with an interview with BusinessWeek in late July, touting the traction Dell (DELL) is seeing in the marketplace with its new strategy. He omitted the fact that this growth would not be accompanied by increased profitability. Forget growing margins, margins actually fell on rising revenue. Why pump up investors/analysts only to report subpar numbers?
Making matters worse, the gross margin shortfall was blamed on (1) revenue recognition issues, (2) "self-inflicted" overly aggressive pricing, and (3) strategic pricing initiatives to take share in Europe.
- The revenue recognition issues could have been guided to in prior quarters. Why would management have been surprised by this? The tone of this call reminded me of recent GE (GE) quarterly conference calls, where under-performance was confidently explained, with little explanation of why this wasn't anticipated or warned about the possibility of happening.
- The implication of the overly-aggressive pricing comment is that someone made sales at prices he or she shouldn't have. How could this happen? I'm hoping/guessing that since inventories went down sequentially for the first time in a while, perhaps the company cleared out some soon-to-be-obsolete product and low prices to prepare the pipeline for the rollout of new products. If it is, in fact, due to overly-aggressive selling, what is the sales approval process that allowed this?
- I'm OK with the idea of strategic pricing to take share. But, if, as Michael Dell said on the call, competitive pressures were no larger than usual, Dell took a serious margin hit to take share in commercial accounts in Europe!
Furthermore, management continues to tout a $3 billion savings number, while not revealing how far along the company is in the process, or how much of the savings will fall to the bottom line. Management wants investors to trust that what doesn't fall to the bottom line will be invested judiciously. Recent performance leaves us uncertain about this.
My clients and I are long-time Dell investors. In a tough economy, it's important to find companies that can grow regardless. Thursday night's results show that Dell fits the bill. We're excited about the steady revenue gains being achieved through rapid overseas growth, a push into retail stores, and new products/services. As the company has repeatedly guided investors, the road to success will be indirect, but I just wish that the message were less so.