Dell 1Q Disappoints, But Points To Successful Move From PC To Enterprise Focus

Dell on Thursday posted disappointing revenue and profit numbers for its first fiscal quarter of 2014, but the company seemed to be going in the right direction in terms of remaking itself from a low-margin PC maker to a provider of business solutions.

That goal of shifting its business to a solutions focus lies behind Dell's $24.4-billion bid to become a private company, a move that would let it reorganize away from the scrutiny of investors.

The shift is an on-going one as evident from the company's first fiscal quarter results wherein Dell's enterprise systems revenue showed a solid year-over-year growth of 10 percent, making it the best performing of Dell's four product and services segments, compared to a 9 percent drop in end-user computing revenue.

[Related: Dell Go Private? History, Research Say It Could Be Good For Everyone Involved ]

Brian Gladden, senior vice president and CFO at Dell, said during the financial analyst conference call after announcing the first fiscal quarter results that his company is investing for future growth.

"As we head into the new fiscal year, we continue to execute on our strategy of being a provider of end-to-end solutions. ... Our continued focus on customers and the ability to meet their needs is evident," Gladden said.

For the first fiscal quarter of 2014, which ended May 3, Dell reported revenue of $14.1 billion, which was down about 2 percent compared to the $14.4 billion reported in the first quarter of 2013.

GAAP income for the quarter was $130 million, down 79 percent from the $635 million reported last year, while earnings per share fell year-over-year by 81 percent to 7 cents, compared to last year's 36 cents.

On a non-GAAP basis, income for the quarter was $372 million or 21 cents per share, down 51 percent from the $761 million and 43 cents per share reported last year.

Analysts had been expecting adjusted earnings of 35 cents per share on revenue of $13.5 billion, according to BusinessWeek.

Gladden said Dell has already spent about $90 million so far on expenses related to the move to go private in a leveraged buyout led by Chairman and CEO Michael Dell and an equity investment firm.

NEXT: Dell's Enterprise Business Up, Except For Storage

Tom Sweet, vice president and corporate controller for Dell, broke his company's results down on a segment-by-segment basis.

The enterprise solutions business, which includes Dell's server, storage, networking and enterprise peripherals, saw revenue rise 10 percent year-over-year to $3.1 billion, driven by a strong server and networking business and tempered by weak storage sales, Sweet said.

The servers, networking and peripherals part of the business saw revenue rise 14 percent over last year, driving in strong measure by Dell's hyperscale server business where the company counts four out five of the top search companies and 75 percent of top social media companies as customers, Sweet said.

Gladden said Dell's server business, which enjoyed its ninth consecutive quarter of growth, was also helped by last year's introduction of Dell's 12th-generation (12G) server line, which helped bring up product margin.

"So the server business is in a good spot," he said. "We feel good about the technology. This is not a place where we are trading pricing for market share."

Storage revenue, however, fell 10 percent over last year to $424 million, a trend Sweet said Dell knows needs improvement.

Gladden said part of the problem is that the entire storage market is shrinking.

The storage market is actually growing, albeit very slowly, according to analyst firm IDC, which in March said fourth quarter 2013 total storage revenue grew a mere 0.7 percent year-to-year. Storage-focused vendors EMC and NetApp saw growth, while systems vendors including Dell, IBM and Hewlett-Packard saw their storage revenue fall, IDC said.

Even so, Gladden said, Dell is confident in its storage portfolio and strategy as a whole. "We feel we're in position to out-perform the market," he said.

Dell's services business revenue rose 2 percent over last year to hit $2.1 billion, Sweet said. That includes a 2 percent rise in support and deployment services to $1.2 billion; an 11 percent rise in infrastructure, cloud and security services revenue to $612 million; and a 15 percent fall in application and BPO services to $295 million, he said.

However, Sweet said, the full impact of Dell's $2 billion-plus acquisition last year of Quest Software had yet to kick in.

"We remain confident the Quest acquisition will be accretive to non-GAAP earnings in Q1 of fiscal year [20]15," he said.

NEXT: Dell's End-User Computing Business Falls

Gladden said Dell realizes that it needs to make more investments in software R&D and sales, and that it is making progress.

"The operating loss, that's what we expected when we set up the business," he said.

Dell's end-user computing business, which includes desktops, mobile PCs and thin clients, saw revenue fall 9 percent over last year to $8.9 billion, Sweet said.

The desktop and thin client revenue fell 2 percent, but Sweet said the trajectory of the business is improving thanks in part to new all-in-one desktop PC designs. Dell's mobility business is down 16 percent year-to-year thanks to customer demand moving away from traditional notebook PCs toward alternative mobile solutions. That mobile PC sales drop led to a 6-percent fall in end-user software and peripheral sales as well, he said.

Dell executives declined to provide future guidance, citing uncertainties around the planned privatization as the reason.

PUBLISHED MAY 16, 2013