By Edwin Chan
SAN FRANCISCO -- Dell, the PC-maker embroiled in a takeover battle between its founding CEO and activist investor Carl Icahn, reported a 72 percent slide in quarterly earnings Thursday, as PC sales extended their downward spiral.
Dell (DELL), which once led the world in computer sales and was held up as a model of production-chain innovation, is increasingly resorting to price cuts to soothe customers nervous about its future and to spearhead a late foray into the enterprise computing market.
"It was predictably bad. It's not a big surprise that margins compressed to the degree that they did, when they're prioritizing sales volume over profitability," Morningstar (MORN) analyst Carr Lanphier said. "You have to offset that uncertainty somehow."
Dell is the subject of a bitter contest over its future, with founder and CEO Michael Dell proposing a $25 billion buyout to take the PC-maker private, and Icahn leading shareholder opposition on the basis that the offer is too cheap.
The dismal results could shore up the CEO's argument that his $13.75-a-share offer, plus a 13-cent dividend, is a fair price for the world's No. 3 PC-maker, which needs to undergo a serious overhaul out of the public investor spotlight.
Analysts say Dell has had to aggressively cut prices to win over enterprise customers nervous about long-term contracts with a company in the middle of a complicated restructuring, and must compete in enterprise services with better-established rivals like Hewlett-Packard (HPQ) and IBM (IBM).
Some have speculated that Dell, which has spent some $13 billion in acquisitions since 2008 to expand into storage, software and networking, may reverse direction and unload assets as it continues to restructure the organization.
"They can't compete on a level playing field when you have a wrestling match over the future of the company," Lanphier said.
Shares of the company dropped 2 cents to $13.68 in after-hours trade, following a brief rise.
The company in recent years has become one of the more prominent victims of PC market erosion from mobile devices, such as Apple's (AAPL) iPad. Sales from Dell's end-user computing division, which incorporates computers, slid 5 percent to $9.1 billion.
Its fortunes remain closely tied to PC sales, which still yield about half of revenue. Global sales of personal computers are expected to fall 7 percent this year and 4.5 percent next year, according to analysts at CLSA.
For its fiscal second quarter, Dell reported sales of $14.5 billion, flat from a year earlier and surpassing the $14.2 billion analysts on average had expected.
But net income fell sharply to $204 million or 12 cents a share, compared to $732 million or 42 cents a share in the year-earlier period. Excluding items, it earned 25 cents a share, barely edging past a 24-cent average forecast, according to Thomson Reuters I/B/E/S.
Gross margins slid a percentage point from the previous quarter to 19.6 percent.
Headed to Court
More positively for Dell, sales from the enterprise solutions, services and software business climbed 9 percent to $5.8 billion, reflecting an increased focus on investing in providing services to corporations and government agencies.
Michael Dell wants to transform the company he founded in a company dorm room in 1984 into a complete provider of computing services like HP or IBM. And he wants to do it away from public market scrutiny, hence the take-private offer.
But Dell's rivals have had several years' head start, and it remains to be seen whether the new strategy of offering customers a hybrid of hardware, software and services will work, at a time more customers are moving into cloud-based systems.
Dell CFO Brian Gladden reassured investors and customers that the company remains focused on effecting that transformation and serving its clients -- a common message repeatedly stressed by senior executives as the buyout distraction continues.
"While the environment continues to be challenging, we remain focused and dedicated to this objective," Gladden said in a public letter published Thursday.
On Friday, the Icahn and Michael Dell contest will spill over into the courtroom. A Delaware court will hear Icahn's request to expedite a hearing on his lawsuit, part of the billionaire activist's attempt to derail the buyout.