Dell’s remake hits a rough patch

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

The Round Rock, Texas, 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 parts in Dell posting second-quarter revenue of $14.5 billion, which was down 8%, or nearly $1.2 billion, from the same quarter a year earlier.

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

Dell gave guidance for the current quarter of a 2% to 5% 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 $10.59 a share Friday, down more than 40% since its peak for the year Feb. 16.

Part of the reason for this year’s disruption is the awkward PC industry transition to Microsoft Corp.’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 mid-size 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.

Remaking the business “is taking longer than they anticipated,” said Patrick Moorhead, an analyst 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% 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 the reinvention of the company is moving ahead, but it remains a long-term project.

The PC maker is about to complete its acquisition of 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 additionally on resources to fuel growth. But the company acknowledges that it has tightened hiring in the last 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 22% in the second quarter from a year earlier. 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 its current fiscal year — which ends in January — will be $57.7 billion, down from $62.1 billion a year earlier.

On a positive note, Dell said 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% from a year earlier. It made up 34% 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% from a year earlier.

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.

Chairman and Chief Executive 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 Ashok Kumar, an analyst with the Maxim Group. “Their long-term prospects are still intact, but in the near term things look more down than up.”

Ladendorf writes for the Austin-American Statesman/McClatchy.