Dell reports second quarter profit growth, but shares loses value over reduced sales forecast

Dell has reported second quarter profit of $890m, up 63% on the same period a year ago, but not all its investors are happy after sales missed target.

Dell has reported second quarter profit of $890m, up 63% on the same period a year ago, but not all its investors are happy after sales missed target.

Although earnings were up, fuelled by business and government spending on refreshing IT equipment, revenue rose only 1% to $15.66bn, short of the $15.75bn that analysts expected.

Operating income was $1.1bn or 7.3% of revenue and cash flow from operations was $2.4bn for the quarter.

The company's share price fell by as much as 8% in late trading in response to the financial results and news that the computer maker lowered its revenue forecast for the remainder of the fiscal year.

Brian Gladden, Dell's chief financial officer, ascribed part of the reduced revenue expectation to Dell's retreat from several businesses, including its storage reseller agreement with EMC, unprofitable software reselling deals, some retail partnerships and several lines of consumer electronic devices.

Gladden told analysts that the discontinued businesses represented over $1bn in revenue over the course of a year. But he says this is all part of Dell's strategy to focus on higher-profit servers, storage, and services, particularly in the mid-market.

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"We're maintaining our focus on developing higher-value solutions and services to drive stronger profitability and smartly manage a balance of growth, increased operating income and cash flow," he said.

Demand for server, storage and services was strong across the board in the UK, says Stephen Murdoch, Dell's senior executive in the European region, and vice president large enterprise and public sector.

The UK public sector business saw a percentage increase in "the high single digits" from the first quarter, which Dell believes was driven by smaller public sector IT projects focused on return on investment and time to benefit, he told Computer Weekly.

UK businesses tend to be strongly focused on return on investment and require robust business cases, says Murdoch. "But Dell is very comfortable with that as we are happy to be open and transparent about costs and benefits," he said.

Product sales were unchanged at $12.6bn, with services and software revenue rising 6% to just over $3bn.

Sales of servers and networking were up 9% to just over $2bn, while storage sales were down 20% to $502m. Spending on servers was highest among small and medium sized businesses and strongest in the Asia region.

Echoing Gladden's comments, Murdoch said storage business based on Dell intellectual property (IP) is strong, but the declines reflected in the financial results were a consequence of the "arithmetic of exiting EMC" as Dell moves from lower-margin sales to high-value solutions based on Dell IP.

Revenue for Dell's enterprise solutions and services revenue grew 4% year on year to $4.6bn, servers and networking revenue increased 9%, and services grew 6% to $2bn.

The company said its core business remains healthy with revenue from desktop and laptop computers up on the previous quarter by 6% to $8.5bn driven by seasonal strength.

"Dell's mid-market design focus on next-generation computing solutions and intelligent data management; services, security and cloud; and end-user computing is driving the shift in the company's mix to a higher-value portfolio and resulting in sustainable, improved results," the company said in a statement.

Dell's design philosophy, said Murdoch, is to focus on mid-market organisations of 500 to 5,000 employees to develop open, simple, effective systems that are easy to deploy and scale up for enterprise use, which works better than trying to scale down enterprise solutions.

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