Dell Shares Drop After Sales, Earnings Decline

Dell shares fell 13 percent Wednesday morning, a day after the company reported first-quarter earnings that missed analysts' expectations.

The company earned $635 million, or 36 cents per diluted share, on $14.4 billion on sales. Excluding onetime charges, Dell would have earned 43 cents per share. Analysts had projected earnings of 46 cents per share.

Sales and net income also came in lower vs. year-ago results, when Dell reported earnings of $945 million, or 49 cents per share, on $15.0 billion in sales.

Shares were trading at $13.06, down $2.02, or 13.4 percent, Wednesday morning.

"It was mixed in terms of our results. Revenue was clearly below what was expected, and there are areas where we'd like to see better execution on our side," said Brian Gladden, senior vice president and CFO, in a video on Dell's Web site. "There were also some areas of real strength that are aligned with our strategy. Our storage business grew; networking grew. Those are areas where we continue to make investments."

Revenue in the Americas fell 7 percent, EMEA revenue fell 1 percent while Asia-Pacific sales were flat, according to Dell.

Pricing pressure also hurt margins in the quarter, Gladden said, but he did not identify which areas faced the most pressure. "It's something we have to watch going forward. Clearly there are some areas where we need to reignite some growth in the business and drive some revenue improvement," Gladden said.

The SMB sector was one of Dell's lone bright spots. Sales of SMB products and services increased 4 percent to $3.5 billion. Public sector sales were down 4 percent to $3.5 billion and large enterprise sales fell 3 percent to $4.4 billion. But commercial sales weren't Dell's biggest problem in the first quarter -- consumer sales fell 12 percent to $3 billion.

Meanwhile, Dell-branded storage was up 24 percent, driven by Compellent and EqualLogic products, and now accounts for more than 95 percent of total storage revenue, according to the company. The company's longtime reseller relationship with EMC is nearly extinguished now, according to Dell. Non-Dell storage revenue fell to $21 million in the quarter from $119 million in the year-ago quarter.

NEXT: Dell Says Channel 'Increasingly Important'

"Excluding the EMC business we're moving away from, that [storage] business grew 5 percent," said Steve Felice, Dell president and COO, in the same video. "There are several cases where we see good ramps, like Compellent and Force 10. Now we're taking on some new IP with SonicWall and AppAssure. We like what we're seeing out of the gate."

On a conference call with analysts, Felice noted that Dell expanded its channel partnerships to more than 103,000 companies in the first quarter. "These partners are becoming increasingly important as we provide a broader set of converged solutions on a global basis," he said.

Dell's Enterprise Solutions and Services business grew 2 percent to $4.5 billion and contributed half of Dell's gross margin, according to the company. Dell Services revenue increased 4 percent to $2.1 billion.

Overall, the large enterprise space was down about 3 percent, Felice said in the video, even though the pipeline was pretty strong. "Clearly, we saw customers putting some decisions off. The pipelines remain healthy so I think this is a case of getting these things converted into actual sales," Felice said.

The public sector space was down 4 percent and had "a variety of ups and downs," according to Felice. "One bright spot was federal spending is starting to come back, especially as we head into a seasonally strong quarter. We saw some weakness in health care and state and local business and elementary [education] business, so it was the smaller-type [segments] that saw budget constraints," Felice said.

The consumer space posed challenges because of budget constraints as well and because consumers are moving to lower-priced products, he said.

"[That's] an area where we've chosen not to have a lot of participation. We don't see a lot of profit there. We had to make sure we stuck with our strategy. The XPS line grew above 33 percent but it's not big enough yet to [overcome] the shift we're making away from the lower-end products to the higher end," Felice said.

Dell provided scant details regarding the current quarter, saying it expected revenue to be "in line with historical seasonal trends" and be up 2 percent to 4 percent from the first quarter. Analysts are projecting earnings of 50 cents per share on sales of $15.42 billion for the July-end quarter.

NEXT: Analyst On Dell's Enterprise Decline

Dell is experiencing normal growing pains as it transitions from a high-volume hardware manufacturer to a more comprehensive services and solutions company, according to Krista Macomber, computing practice analyst at Technology Business Research.

"Dell is successfully increasing its contribution of solutions to the revenue mix, but financial performance during 1Q12 indicates some challenges in increasing enterprise market share," Macomber wrote in a report on Dell's earnings. "The enterprise revenue decline is not yet a significant threat to Dell's strategic direction. Considering Dell's expansive existing install base and go-to-market know-how within the midmarket, Dell's midmarket customers are adopting its solutions and services ahead of enterprise sector customers."

To ensure strengthened execution on core enterprise solutions growth initiatives, Dell will continue to refine its go-to-market strategy," wrote Macomber. "Competition from rivals such as HP and IBM will remain strong, but adapting to longer and more complex sales cycles with enterprise customers and focusing on selling integrated solutions rather than singular pieces of the infrastructure will help Dell to win more deals and increase its market share."