What to expect from Dell's quarterly progress report

Dell's third-quarter earnings results aren't expected to be nearly as impressive as rival HP's.

Hewlett-Packard just showed its cards early, revealing Monday that next week it's going to inform its investors of some pretty impressive revenue gains during the third quarter.

That comes despite the faltering economy and increasingly ominous signs that when it comes to tech, this recession will hit the PC market the hardest. As we reported here earlier, HP is certainly well-positioned to weather a downturn , while rival Dell is still in the midst of a turnaround, and is on slightly shakier ground.

Dell's Round Rock facility
Is Dell's turnaround moving breezily, or does the company face stiff headwinds? Dell

Judging by analyst predictions and industry reports, Dell's earnings won't be nearly as impressive. Both UBS and Bernstein Research put out analyst reports saying they expect Dell to report revenue below expectations, but for earnings to be about what they (and the rest of Wall Street) expected, at 32 cents per share. UBS expects third-quarter revenues of $16.5 billion, while the Wall Street consensus is $16.4 billion.

Dell will report its earnings after the close of the markets Thursday. Here's what we'll be looking for when founder and chief executive Michael Dell and CFO Brian Gladden get on the phone to discuss third-quarter results with company investors.

• Margins. The company's operating margins are key, according to Bernstein analyst A.M. Sacconaghi, because it's had the most direct recent impact on Dell's stock.

The third-quarter operating margin should be an improvement over the previous quarter, analysts believe because Dell has been less aggressive about competing on price this quarter, especially in Europe. Also, the company finally shed the last of the jobs slated for elimination more than a year ago, and component pricing was more favorable during the quarter as well.

However, Dell has also continued to expand its retail presence and build up its business in international markets, both things that come with lower margin expectations.

• Netbooks. There's still concern over profitability in the consumer product segment. During a recent earnings call, Dell said its relatively new consumer business wouldn't improve in that regard until the second half of 2009.

Dell Mini 9
Dell's Mini 9: Welcome to the Netbook craze. Dell

However, the company has embraced the PC industry's latest obsession: Netbooks. Both the Inspiron Mini 9 and Mini 12 were announced this year, though only the Mini 9 will have shipped to customers during the quarter.

Though Dell probably won't tell us exactly how many Netbooks it's sold, we can anticipate the company will at least bring it up to demonstrate to investors it's embracing what they will say is a whole new product category with a lot of potential. (In reality, it's not clear whether Netbooks are simply cannibalizing the budget notebook category.)

• Cost cutting. Though it recently finished the 10 percent staff cuts it promised in 2007, both UBS and Bernstein analysts say they see room for further layoffs to trim even more costs. Dell earlier this month told employees it was instituting a hiring freeze , dismissing contract employees, and offering voluntary unpaid leave. If that's not enough, further headcount reductions are at least conceivable.

• The economy. The company said in September it was already seeing "softness" in IT spending in the U.S. and Western Europe. IDC issued a report last week forecasting just 2.6-percent growth in corporate technology budgets worldwide.

Though Dell has not offered forward-looking guidance to investors for the last several quarters (and is expected to continue the tradition), investors will likely hammer Gladden and/or Dell with questions about how the faltering economic environment is going to affect the PC makers' outlook for the critical fourth-quarter holiday season and into next year.

About the author

Erica Ogg is a CNET News reporter who covers Apple, HP, Dell, and other PC makers, as well as the consumer electronics industry. She's also one of the hosts of CNET News' Daily Podcast. In her non-work life, she's a history geek, a loyal Dodgers fan, and a mac-and-cheese connoisseur.

 

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