Dell earnings down 17 percent

This post was updated at 3:50 p.m. PDT with comments from Michael Dell and analysts.

Dell on Thursday reported its second-quarter results, and the company admitted it had more work to do to improve its performance.

Its second quarter profits were down 17 percent to $616 million, from $746 million a year ago. Dell reported earnings of 31 cents per share, missing analysts' expected 36 cents per share.

Revenue was $16.43 billion for the quarter, an 11-percent increase from a year ago. That was helped by a big boost in shipments of the company's hardware--up 19 percent worldwide.

But Wall Street didn't like what it heard: Dell's stock was down more than 10 percent to $22.50 in after-hours trading.

New CFO Brian Gladden presided over his first earnings call for Dell.

Despite lower-than-expected profits, Gladden called it "a great growth quarter" for Dell. The cost of growth in Europe in particular, he said was partly to blame for this quarter's results. In other words, in an attempt to gain share in both consumer and enterprise markets, Dell spent more than it did last year.

With shipments up in all markets, they say it's working. Specifically, Gladden pointed out servers and notebooks. Server shipments increased 19 percent, and notebooks 44 percent. The company has increased its global retail presence from basically nothing a year ago to having its products on shelves in major electronics chains in the U.S., Europe, China, India, and more.

But a bigger issue for the IT industry in general is the current conservative spending climate. Gladden said its business with large corporate customers and state and local governments has seen the most slowing.

"But it's conservatism that's been relatively consistent for the last six months," he said. It jibes with what rival Hewlett-Packard reported during its earnings call last week, when CEO Mark Hurd said he didn't see much of a change between last quarter and the current quarter.

But Gladden did say that his company is beginning to see some of that slower spending spreading to Western Europe and Asia.

Gladden said repeatedly that there was "more work to be done," to improve profitability and decrease costs. To that end, Dell still isn't done with layoffs. The company said in early 2007 it had a goal of lowering headcount by 8,900. As of now, they've reduced staffing by 8,500. The last 400 will be gone by the third quarter, according to Gladden.

Dell does not provide guidance to Wall Street for the forthcoming quarter, which makes analysts more than a bit nervous. That was quite obvious on the earnings call Thursday, when analysts repeatedly asked Gladden and CEO Michael Dell about why the company was so aggressive in trying to gain market share in Europe, and didn't have the profits to show for it.

The CEO's repeated response was that the company is seeing gains in market share as a result, but still has some fine-tuning to do in regard to pricing.

"When you're restarting growth, it's an imprecise process," Dell said. "We see some parts of our business where we were probably a bit too aggressive, (and) we're modulating for that now."

Though Wall Street appeared fixated on costs of driving up the company's notebook business in Europe, it's missing the larger picture, according to Gartner analyst Mark Stahlman. Specifically, Dell's growing cloud computing business.

"This is a very significant dynamic in the server market today that I don't think Wall Street has caught up with," he noted.

Dell began its dedicated cloud services business 18 months ago, and has acquired big-name customers like Salesforce.com, Facebook, Yahoo, and Microsoft. It's an area Dell is growing quickly, but it's also one that Stahlman believes is not well-understood by the financial analysts watching Dell.

Dell's strength has traditionally been in the enterprise market, and it says it will continue to grow its services business to take advantage of growing demand from its current roster of customers.

Regarding the company's consumer business, it is still in the growing stages. Margins on consumer notebooks continue to decline, as do the average selling prices. But, demand for consumer notebooks are growing in many markets, including new ones like China and India. The key will be Dell's ability to exploit that better than their rivals, HP, Lenovo, and Acer.

Dell's CFO did say not to expect improvements in profitability in the consumer business for another four quarters. And that's fine, according to Gartner's Stahlman.

"It's correct that Dell has focused on enterprise and consumer will follow in their priorities. That's the right thing for them to do," he said.

In sum, Dell is still trying to turn itself around. While the previous quarter's earnings results may have been more reassuring to investors, the company is still undergoing change internally and they don't have every wrinkle ironed out.