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Dell’s remake hits a rough patch

By Kirk Ladendorf, Austin American-Statesman –

AUSTIN, Texas — Dell Inc.’s journey toward business transformation has run into a rough stretch of road.

The Round Rock, Texas-based computer maker is shrinking this year in the face of weaker global demand for conventional PCs, intense low-cost competition from Asia and the rise of Apple Inc. and its highly successful smartphones and tablet devices.

Those factors all played their parts in Dell posting second-quarter revenue last week of $14.5 billion, which was down 8 percent, or nearly $1.2 billion, from the same quarter a year ago.

Not only was the first half of the year difficult, but the company warned that the second half could be just as bad.

Dell gave guidance for the current quarter of a 2 percent to 5 percent sequential decline in revenue in what is normally one of the stronger sales quarters of the year. The company also officially lowered its earnings guidance for the current fiscal year to $1.70 a share or greater, from the previous guidance of $2.13 or greater.

Dell’s stock price has plummeted in the face of such news. It closed at $10.91 a share Tuesday, down more than 40 percent since its peak for the year on Feb. 16.

Part of the reason for this year’s disruption is the awkward PC industry transition to Microsoft’s latest operating system software, Windows 8, which is expected to be launched in October.

Dell and other PC makers will unveil several new products in conjunction with the Microsoft launch, but Dell executives said it could take until early next year before those new products deliver the revenue boost that investors want.

Analysts continue to support Dell’s broad strategy of remaking its business to become a broad supplier of computer hardware, software and services to large and midsized business customers.

But they are worried about the weakness in the old part of Dell that depends primarily on sales of desktop and laptop personal computers.

“The journey (toward remaking the business) is taking longer than they anticipated,” said analyst Patrick Moorhead with Moor Insights & Strategy.

“We remain concerned that Dell is in a tough fundamental position sandwiched between low-cost players (like Lenovo and Acer) and Apple (on the high end) encroaching more in its core PC business,” wrote analyst Shaw Wu with Sterne Agee & Leach Inc.

“Despite efforts to grow beyond a PC company with multiple acquisitions over the past few years, we estimate 65-70 percent of (Dell’s) business is still tied to PCs. We still believe Dell needs to take bolder, more aggressive steps to reinvent itself.”

Dell management said last week that the re-invention of the company is moving ahead, but it remains a long-term project.

The PC maker is about to complete its acquisition of California-based Quest Software for $2.4 billion.

And executives said they are continuing to look for other acquisitions to add key pieces to the company’s expanding product and services portfolio.

Dell is spending on acquisitions and spending additionally on resources to fuel growth. But the company acknowledges that it has tightened overall hiring in the past six months.

Brian Gladden, Dell’s chief financial officer, said the company continues to walk away from unprofitable sales of low-end computers.

As a consequence, Dell’s consumer business dropped by 22 percent in the second quarter from a year ago. And the company said business will remain weak in the current quarter as retailers clear their shelves for the impending launch of computers based on Windows 8.

That means Dell is becoming a markedly smaller company in overall revenue this year. Jayson Noland, an analyst with R.W. Baird & Co., now estimates that Dell’s revenue for the current fiscal year — which ends in January — will be $57.7 billion, down from $62.1 billion a year ago.

On a positive note, the company said that its sales of hardware, software and services to large enterprise customers is playing a stronger role in the company.

That business totaled $4.9 billion in the quarter, up 6 percent from a year ago. It comprised 34 percent of the company’s revenue and more than half its profit. That part of the business is now approaching a $20 billion run rate.

The computer maker remains profitable, despite the falling revenue.

Its profit for the latest quarter was $732 million, down 18 percent from a year ago.

Despite its present pain, analysts agree that Dell is making the right long-term moves by becoming less dependent on the core personal computer business.

“Michael Dell is choosing long-term strategy over short-term profits,” Moorhead said. “I give Dell credit to have the guts to do that. Michael is looking at the next 10 to 15 years and not the next quarter.”

“Their transformation is a work in progress and it is going to take years,” said analyst Ashok Kumar with the Maxim Group. “Their long-term prospects are still intact, but in the near term things look more down than up.”

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