Dell's net income, revenue drop for second quarter

But the company expects a strong second half of the fiscal year with heightened demand for its products

Dell on Thursday reported a drop in net income and revenue during the second fiscal quarter of 2010, but said it anticipates that the global economy will improve and IT spending will be strong in the second half of this year.

The PC maker reported net income of US$472 million for the quarter ended July 31, a 23 percent drop from last fiscal year's second quarter. Earnings per share were $0.24, which beat estimates of $0.23 based on projections of analysts polled by Thomson Reuters.

Net income and revenue improved from the immediate prior quarter, Dell said. Net income grew by 63 percent from the first quarter of 2010, while revenue grew by 4 percent.

Dell reported revenue of $10.6 billion, a year-over-year drop of 22 percent and short of analyst expectations of $12.6 billion.

The company's revenue dove year-over-year across all segments, including the mobility market, which includes laptops, and in the desktop PC category. Mobility revenue was $3.9 billion, a 21 percent yearly drop, and recorded no sequential quarterly gains. Desktop PC revenue was $3.3 billion, a 33 percent yearly drop, but 5 percent growth sequentially.

CEO Michael Dell expressed optimism about the upcoming quarters. If current trends in demand continue, the company expects revenue will be better in the second half of the fiscal year than it was in the first, he said in a statement.

Desktop unit shipments were down 23 percent year-over-year, while laptop shipments were flat due to the weak environment and a change in Dell's product mix.

The company's profit margins on consumer products were affected by pricing pressure and the high cost of components.

Dell is focusing on profits, not market share, Michael Dell said during a conference call. "If we wanted [market share], we'd go and sell a whole bunch of netbooks," he said. Netbooks carry lower profit margins for vendors.

Instead Dell is relying on enterprise sales to increase its profit margins, the CEO said. Wary of the economy, companies have held back on purchases, but Dell saw demand for enterprise products stabilize during the quarter, he said. Product orders improved during July and August and could continue to rise into the upcoming months, he said.

Dell saw big revenue gains from its EqualLogic storage products in particular, the company said. EqualLogic revenue was up 42 percent year-over-year, though overall storage revenue was down by 19 percent.

"The EqualLogic platform is big for us," Dell said. During the quarter, the company launched the EqualLogic PS4000 iSCSI line of storage area networking (SAN) arrays for small businesses.

Dell already has a relationship with storage vendor EMC, but the emergence of EqualLogic won't hurt that relationship, Michael Dell insisted. EMC serves a different customer base looking to implement storage based on the Fibre Channel platform, he said.

The strong demand for enterprise products will continue into the next calendar year as IT administrators look to upgrade hardware, Dell said. The upgrades will be driven by new processors like Intel's Nehalem chips and the continued growth of server and client virtualization, he said. Upgrades in client hardware could be triggered by software like Windows 7, Microsoft's next OS due for release in October.

"We see a lot of old machines out there that are going to be replaced," Dell said. He admitted that assuming Windows 7 will be a big success could be risky, but early feedback is positive, he said. Some customers may also upgrade hardware for Office 2010, due in the first half of next year.

About 44 percent of Dell's revenue during the quarter was from outside the U.S., with the BRIC countries (Brazil, Russia, India and China) making up 10 percent. Revenue in those countries declined 17 percent from a year ago but was up 16 percent sequentially. Dell's revenue in the U.S. and the Asia-Pacific grew 11 percent sequentially, but revenue in Japan dropped 24 percent.

In July, the company said that demand for products was stabilizing. Dell also has undertaken a plan to cut costs by $4 billion by the end of fiscal 2011, a change from $3 billion in cost cuts it had announced in May.

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Agam Shah

IDG News Service
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