Amid Buyout Battle, Dell Doubles Down on Turnaround Plans
Quarterly earnings results from Dell crossed the wires less than an hour ago, and as expected, based on leaks that emerged earlier this week, they’re worse than what analysts had forecast.
Earnings per share were at 21 cents, a whopping 14 cents below the consensus view, while revenue, at $14.07 billion, was above the forecast by about a half-billion dollars.
During a conference call with analysts that wrapped up just a little while ago, Dell management struck a tone of sticking to its strategic guns. With the PC market contracting fast, it has gotten selectively aggressive on pricing in order to try and take share away from rivals like Hewlett-Packard and Lenovo. At the same time, the results show growth in expenses like research and development spending that aren’t exactly helping gross margins.
In short, Dell is starting to act a lot more like the privately held company it expects to be before the summer is over, accountable only to its owners.
In their questions, analysts sought to tease out what details they could about the effect of the proposed go-private transaction on things like employee retention and relationships with key customers. CFO Brian Gladden and head of investor relations Rob Williams shot those questions down.
Here’s a summary of the substance of the conference call (all times are Pacific):
1:46 pm: On hold waiting for the conference call to begin with what sounds like some Vivaldi playing in the background.
And now things are getting under way.
Standard conference call boilerplate from head of investor relations Rob Williams.
Brian Gladden is speaking. “We continue to invest in strategic capabilities.” He’s talking about the acquisition of Entratius, which closed last week.
Gross margin was down 40 basis points sequentially.
“We continue to face a competitive pricing environment … and this has affected our profitability.”
Selling and general costs were up 4 percent.
R&D spending is up 33 percent.
Gladden: There were almost $90 million worth of expenses related to the go-private transaction that were excluded from the non-GAAP figures.
1:54 pm: Tom Sweet is talking about business segments. Here comes the news on server sales that Michael Dell said was going so well.
Servers, Networking and Peripherals saw sales grow by about 10 percent, but sales of storage fell about 10 percent.
Sweet: “Dell powers four out of the top five search engines and 75 percent of the top social media sites worldwide.”
Sweet is covering a few customer wins. And now he’s on to software. Revenue was $295 million and had an operating loss of $85 million. “We remain confident that the Quest acquisition (which was $2.4 billion) will be accretive by FY 2015.
Sweet is talking about End User Computing, a.k.a. the PC segment, and says the environment continues to be competitive. The plan is to try and cut $1 billion out of operating costs by 2015. But customers are “diverting spending to alternative mobile solutions.” Does he mean iPads? Yup.
2:01 pm: Sweet is talking about a big PC win with Marsh and McClennan that has 55,000 seats. “We won despite a key competitor that was a longtime incumbent.” Who? HP maybe?
Question and Answer session is getting underway. First is Katy Huberty from Morgan Stanley. “Can you step back and say if the margin decline is what you expected when you rolled out the more aggressive pricing strategy?”
Gladden: We’ve been talking about this for a few quarters, the need to adjust pricing. There are parts of the business where we are beginning to see some elasticity. Demand has been weaker than expected. These are accounts that we’re gaining that we feel good about their profitability. We feel for the long term we think it’s the right thing to do. If you look at the share dynamics, we did improve our share position in a market that is pretty tough.
A question from Tony Sacconaghi of Sanford Bernstein: Is there a minimum level of profitability that you are willing to sustain in an effort to hold or gain share? Also a question about cost-cutting.
Gladden: Without providing details of specific initiatives, we have continued to take cost out of the business. We are choosing to reinvest those dollars in sales and R&D. I think those things are going on concurrently. (Essentially what he’s saying is that Dell is acting like it’s a private company already.)
As Gladden is speaking I’m looking at the slide presentation. The worst geographically was Asia-Pacific, where sales fell 12 percent year on year. Ouch. Sales in the Americas were up slightly. The BRIC countries fell 17 percent, led by China which fell 24 percent. Super ouch.
Maynard Um: Are customers holding out given the go-private transaction?
Gladden: The customer base has been very supportive of the company. For the conversations I have been a part of they have resulted in many opportunities for the company.
FYI Dell share price update: In after-hours, Dell is trading at $13.37, which is 28 cents below the $13.65 that Michael Dell and Silver Lake have offered shareholders to take it private.
2:11 pm: Question from Steve Milunovich from UBS. He’s asking about changes in sales model on PCs that’s expected as Dell goes private.
Gladden: I wouldn’t say our strategy has changed at all. We’ve adjusted our pricing accordingly and expanded our offerings across the portfolio. This is not a new strategy or business model for us. It’s adjusting tactics given where the market is going.
Question from Credit Suisse: In terms of pursuit of new PC customers, have you put the investments in that you need to or is there more effort to come through?
Gladden: Basically says the strategy hasn’t changed.
Question from Deutsche Bank, asking about servers and the storage business. Servers are good but he says storage doesn’t seem to be getting good attach rates.
Gladden: With servers, we’re winning in the marketing. And when you look at density-optimized servers, we’re winning. We feel good about the server business. You don’t see us trading price for growth there.
About storage. We feel like that business is growing with the market. It’s shrinking with the market. That is not what we’d like to see, obviously. We’re working on it. We’ve added commercial resources over the the last 18 months. We feel positioned to out perform the market.
Question from Keith Bachmann at BMO: How might the M&A strategy differ if the go-private transaction happens? Also about employee retention during the transaction.
Rob Williams: No answer to the first question.
Gladden: Attrition has been about normal for us.
Another question: Does the PC market get softer or better over the next four to six quarters?
Gladden: There are multiple dynamics playing out. There’s a lot driving a refresh cycle. We see improvements in corporate and SMB segments. But we see consumer and government, not so good. Windows 8 has not been the catalyst to growth that we hoped it would be. (That’s a big admission.) You look at recent external data, and we would expect to see over the next few quarters declines in PC demand. We’re trying to run the business based on that.
2:22 pm: Can you update us on the peformance of Quest in the quarter?
Gladden: It’s progressing as expected. We expect it to be accretive in the first fiscal quarter of next year. (Or a year from now.)
Question from Bill Shope of Goldman Sachs, about the PC pricing reductions: Which accounts are the ones that get the discounts? Where do you draw the line on profit vs. market share?
Gladden: We know where long-term strategic accounts are. In many cases those are accounts we’ve had before and have walked away from. I think we’ve been selective. There are clearly some unit volume opportunities where we can sell a lot of units, but they don’t create any profit benefits.
2:29 pm: One last question, this one on support and deployment revenue, which was up.
Tom Sweet: We’re happy with the attach rate there. The team has seen some good things with support products. We’ve been able to keep the attach rate relatively high. Despite downward pressure, it will be a good business.
Gladden: We think that’s a good business on the enterprise side, too.
And that ends the call. Thanks for tuning in!