August 28, 2009

Dell Q2 profits down but future looks 'brighter'

Enterprise spending expected to boost earning for rest of year

By Agam Shah

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Dell has reported a decline in profits and turnover during the second quarter of 2010, but said it anticipates that the global economy will improve and IT spending will be strong in the second half of the year.

The PC maker reported net income of $472 million (289 million) for the quarter ended July 31, a 23 percent drop on the same period last year.

Dell reported revenue of $10.6 billion (£6.5 billion), a year-on-year drop of 22 percent and short of analyst expectations of $12.6 billion (7.& billion).

The company's revenue fell year-on-year across all segments, including the mobility market, which includes laptops, and in the desktop PC category. Mobility revenue was $3.9 billion, down 21 percent. Desktop PC revenue was $3.3 billion, a 33 percent fall.

Dell is focusing on profits, not market share, CEO 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 stabilise during the quarter, he said.

Dell saw big revenue gains from its EqualLogic storage products in particular, the company said. EqualLogic revenue was up 42 percent year-on-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 departments 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.

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