Dell Has Some Explaining to Do

Michael Dell, Chairman & CEO, Dell
Michael Dell, Chairman & CEO, Dell

Michael Dell in his prepared comments in the company's Third Quarter earnings report points to a recovery in IT spending and cites Microsoft's Windows 7 release as juicing small and medium business spending, as well as spending by the consumer.

He says momentum continues in Dell's business.

Trouble is, the numbers the company is reporting in that same release don't necessarily prove his point.

Dell reported 23 cents a share in EPS including a nickel a share in pre-tax expenses, but not including a penny of amortization intangibles, on $12.9 billion in revenue. Both numbers well below consensus of 28 cents on $13.2 billion. The company's Large Enterprise revenue of $3.4 billion was more than $200 million under the $3.64 billion that Pacific Crest's Andy Hargreaves was anticipating; and while the company's $3.7 billion in Public business beat expectations by $300 million, and its Small/Mid-sized revenue was in line at $3 billion, its Consumer business of $2.8 billion was $150 million below some estimates.

Worse for Dell, margins continue to feel the pressure, hitting 17.3 percent on the quarter versus the better than 18 percent anticipated. Overall shipments also were flat sequentially and down 5 percent year over year. Large Enterprise and Small and Medium business segments did see sequential improvements in shipments, revenue and operating income.

And on top of that, while its contemporaries in the market place continue to cut costs, with many ahead of schedule when it comes to their ambitious plans to reduce expenses, Dell conceded tonight that there's still "significant" work to be done to complete its plans to slash $4 billion. In other words, Dell might be improving its efficiencies, and business might be improving around it, but neither is improving nowhere near the pace investors have been hoping for.

For the fourth quarter, Dell says revenue will be sequentially better than the third quarter, and is seeing "improvement in underlying sequential trends in several areas, including a significant portion of its commercial business."

But the overall improvements seem to be occurring far slower than analysts expected. And when you take Dell's news against the backdrop of rival Hewlett-Packard's pre-announced earnings from last week when the company disclosed its purchase of 3Com , Dell's news becomes a little more troubling. That's because HP continues to extend its market leadership against Dell, opening a competitive chasm that Dell may not be able to close. That could be a problem.

Meantime, expectations for this company might have to be rejiggered, and ratcheted lower. I don't argue that Dell has a role to play in the market place; that its technology is compelling and its products worthy. But the Street's perception of what is a success, and what market share this company can realistically expect to control might be still be significantly out of whack; at least that's the message from a miss like this one. Dell is suffering from an identity crisis that many experts hoped would be dissipating, and an important step in that direction was supposed to be better numbers than the company reported tonight.

Dell is a disappointment tonight, no two ways about it.

Questions? Comments?