| Dell’s headquarters in Round Rock, Texas. Image: Dell |
Michael Dell’s turnaround plan isn’t moving as quickly as Wall Street would like. And investors let him know it by sending his company’s stock down nearly 10 percent in after hours trading on Thursday following Dell’s third-quarter earnings report.
On the most basic level, the drop is about investor annoyance that Dell (DELL) is still spending so heavily as it turns things around. Analysts on average had expected revenues of $15.34 billion and earnings of 35 cents per share. Dell beat the revenue number, coming in at $15.6 billion, and barely hit the profit number when one-time charges are excluded. Include those charges, and Dell missed by a penny.
But it’s not all about costs. Some of the investor unease comes because this isn’t the predictable Dell they’re used to.
The old Dell would boldly proclaim its performance targets and consistently meet them — or at least appear to. The company has admitted that it tweaked its earnings numbers to meet Wall Street targets, and said a month ago that it had overstated profits by $92 million between 2003 and 2006. The overstatement amounted to less than 1 percent of the $12 billion in profits the company reported during that period, and showed just how far Dell was willing to go to seem perfect. Dell had acted like an “A” student who cheats on a test to find the one answer he doesn’t know.
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Not all the news at Dell was bad. Revenues rose 8.5 percent, and profits rose 27 percent from the year before. The company posted growth in every segment except the U.S. Consumer market. Server sales increased 8 percent to $1.6 billion, and storage system sales also grew 8 percent to $600 million. Laptop sales jumped 19 percent to $4.7 billion. Despite gains, Dell continues to lose PC market share to Hewlett-Packard (HPQ). Researcher iSuppli reported that HP now has about 19 percent of the global market to Dell’s 15 percent. Domestically, smaller rivals like Apple (AAPL) are also growing faster.
Dell executives didn’t do much to clarify things on Thursday. When an analyst asked chief financial officer Don Carty whether investors should still expect the 10 percent head count reduction that Dell had promised, Carty first said that yes, “We are confident that we can run the business — even as it changes — more efficiently on the op-ex side than we have in the last year, and I think you’ll see evidence of that pretty promptly.”
Then, however, Carty said Dell would be simultaneously hiring in some areas where the company is growing.
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Dell’s determination to grow even as it cuts is the right move if the company can pull it off. HP has used a similar strategy to de-emphasize maturing businesses even as it moves aggressively into new areas, and Dell needs to stay competitive with its resurgent rival.
But this “cut while we grow” strategy from Dell is also going likely to test Wall Street’s patience. When a company is in the throes of a turnaround, investors like to see steady cost-cutting and predictability, which help them feel confident that profits will perk up.
The bottom line? You still need a strong stomach if you want to hold onto Dell.