Dell cuts sales outlook, cites 'uncertain demand environment'

Dell has been able to keep profits humming even as growth slows. The company sees slower sales growth ahead.

Larry Dignan
4 min read
Dell reported better-than-expected second quarter results, but cut its revenue outlook for the rest of its fiscal year.

Specifically, Dell said it will see better profit growth with non-GAAP earnings up 17 percent to 23 percent, but sees a "more uncertain demand environment." As a result, Dell said its fiscal 2012 revenue growth will be 1 percent to 5 percent, down from its previous expectation of 5 percent to 9 percent. Third quarter revenue will be flat with the second quarter.

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That flat sequential revenue forecast is well below estimates. Wall Street was expecting earnings of 45 cents a share on revenue of $16.18 billion.

The outlook overshadowed a solid second quarter from Dell even though revenue was light. Dell reported net income of $1 billion in the second quarter, or 48 cents a share, on revenue of $15.66 billion. Non-GAAP earnings were 54 cents a share.

Wall Street was expecting earnings of 39 cents a share on revenue of $15.76 billion. Analysts had expected weak consumer demand to curb revenue growth, but boost profit margins.

In its statement, Dell said that enterprise demand--the sector that drives its financials--remained solid, but the sales pipeline weakened in the last few weeks. It's clear that the demand environment is weaker and a bit more uncertain than what we had in our previous view," said CFO Brian Gladden.

Gladden added:

We saw some weakening in parts of the market in the second half of the quarter that I would say we've seen continue. That would be the things we highlighted, the U.S. consumer market clearly and the federal business. It has clearly been a bit softer in the last few weeks and obviously we're monitoring that as we move throughout the quarter.

CEO Michael Dell, however, said the corporate upgrade cycle remains in tact. Those investments usually play out over multiple quarters, he added.

On a conference call, Gladden and Brad Anderson, senior vice president of Dell's enterprise business, made the following points. Michael Dell also talked strategy:

• Dell will continue to invest in its sales footprint. "We're also significantly increasing investment levels in our sales and go to market capabilities across the business. These investments are substantial and are now contributing to our growth, shifting our mix and improving our operating income," said Gladden.
• "Our core business remains healthy and we continue to see solid demand for our server, Dell storage, and services businesses. As we continue to execute on our cost initiatives across the business and focus on higher value products with Dell owned intellectual property throughout our business, our product margins remain strong and contributed to outstanding operating income and excellent cash flow generation this quarter," said Gladden.
• Servers and networking gear continues to benefit from a corporate upgrade cycle and strong midmarket demand.
• Anderson said the company will focus on the long run even if IT demand stumbles.
• Dell said the company is transforming its product and business mix and views acquisitions as a way to bolster research and development. "We know the values created not by acquiring companies but rather by successfully integrating them along with continued investments in research and development and sales capabilities. It's early, but we're building a strong track record of successful integrations. Both are organic and inorganic investments are being made with a mid market design focus," said Dell.

Michael Dell didn't say much about the company's future tablet plans, but indicated it would be a likely player with Windows 8 and Android devices.

When asked about his take on Google's purchase of Motorola for $12.5 billion, Dell noted the deal hasn't closed yet.

Here's how Dell handicapped Google-Motorola and the tablet market overall:

It's too early to say because Google obviously hasn't finished the transaction and they haven't said a whole lot about it. Certainly patents play a big role here and having Android with a stronger ability to exhaust patent claims against it probably sets up an interesting competitive dynamic. We're still quite interested Android. I'll also tell you that our early work on Windows 8 on the tablet side looks to be pretty encouraging and so we think it's shaping up to be a competitive environment. I don't think beyond those two that there are viable alternatives that make sense so there's a lot of other noise in the market that I don't think will amount to much of anything.

In other words, Dell, which obviously can't license Apple's iOS, sees a three horse tablet race at some point.

Here's the unit breakdown:

•Large enterprise revenue in the second quarter was up 1 percent from a year ago. Operating income for the unit was $448 million.
•Public sector revenue for the second quarter was $4.5 billion, down 3 percent from a year ago. Operating income checked in at $484 million.
•Second quarter SMB revenue was $3.7 billion, up 5 percent, with operating income of $404 million.
•Consumer revenue was $2.9 million, up 1 percent. However, operating income was $73 million, a sum that lags other units by a wide margin.
•Dell's commercial business delivered second quarter sales of $12.8 billion, up 1 percent from a year ago. Dell services revenue was $2 billion in the second quarter, up 6 percent from a year ago.
•Dell-owned storage sales gained 15 percent in the second quarter compared to a year ago. The company cited strength for its midmarket EqualLogic gear.

Updated at 4:13 p.m. with charts, and more details from the follow-up conference call.

This story was originally published at ZDNet's Between the Lines.