For Dell's Q3, Falling PC Business Offsets Rising Enterprise Sales

Dell on Tuesday reported flat revenue but strong earnings for its third fiscal quarter of 2012, reflecting strong enterprise server, storage, and networking sales balanced by weaker PC sales.

However, economic uncertainty and the hard disk drive shortage caused by this year's massive Thailand flooding tempered Dell's outlook, with the company now expecting overall growth for its fiscal year to be on the low side of its previous guidance.

Revenue for Dell's third fiscal 2012 quarter, which ended October 28, was $15.4 billion, down $31 million from the same period last year. However, the company reported, profit for the quarter was $893 million, up 9 percent compared to the $822 million reported last year. Earnings per share rose a solid 17 percent over last year to reach 49 cents.

This represents Dell's second straight quarter of flat revenue growth. For its second fiscal quarter, the company reported 1 percent growth in total revenue.

Michael Dell, chairman and CEO of the company which bears his name, said during his prepared remarks for the analyst conference call that he's pleased with the third-quarter results.

"This is a new Dell, and we're much better equipped to give our customers a clear path to productivity enhancing solutions. We're growing Enterprise Solutions and Services, including developing and acquiring key IP and sales capability, and the result is growing earnings and cash flow," Dell said, according to the transcript for the call provided by the company.

Dell's enterprise solutions and services revenue rose 8 percent over last year to hit $4.7 billion. That included a 13 percent increase in server and networking revenue, which Dell attributed to continued momentum in server virtualization.

However, the real stars were Dell's EqualLogic and Compellent storage products, which drove Dell-branded storage revenue to grow 23 percent over last year. Dell-branded storage now accounts for 84 percent of all Dell's storage revenue. That helped offset the 15 percent drop in overall storage revenue stemming from Dell's decision to no longer sell storage products from EMC, its previous long-term partner.

Dell's PC revenue during its third quarter slipped significantly, with year-over-year desktop PC revenue down 6 percent and notebook PC revenue down 2 percent. However, Dell reported a 20 percent increase in gross margin dollars for its PC business compared to last year as its sales in this part of the market were more focused on high-value solutions than in the past.

Dell also reported services revenue growth of 10 percent compared to last year, and its services backlog was up 11 percent over last year.

Dell's transition to focusing more on higher-value solutions also showed in the company's revenue mix by market sectors. The company reported revenue from large enterprise customers up 4 percent over the same quarter last year, compared to a 1-percent rise in SMB revenue, a 2-percent drop in public market revenue, and a 6-percent fall in consumer market revenue.

Michael Dell said the move away from low value opportunities was deliberate.

"We're choosing not to participate in low value opportunities, which have put short-term pressure on revenue growth... We continue to believe that increasing our share of industry profits is the right strategy," he said, according to the transcript.

Contrary to Dell's long-term reputation as a commodity PC vendor, the company has been quickly ramping up its research and development capabilities. Dell said its R&D spending is running at a rate of $1 billion per year, and that the company now has over 5,000 patents or patents pending.

Next: Revenue Guidance Down, Margin Guidance Up

Looking forward, Dell's guidance reflects its move towards enterprise-focused, high-value solutions. Dell said for all of fiscal 2012, non-GAAP operating income is trending above its previous outlook of 17 percent to 23 percent growth. However, it is trending towards the bottom of its previous revenue outlook of a 1 percent to 5 percent growth for the year.

Jeffrey Clarke, Dell vice chairman of global operations and end user computing solutions, said that Dell, like the industry as a whole, is suffering from the hard drive shortage caused by this year's Thailand floods, and that Dell has put programs in place to help mitigate the impact.

The flood waters in Thailand are still receding, which makes it difficult to pinpoint the magnitude or duration of the hard drive shortages, Clarke said.

"So, that puts the industry in an allocation environment at least through Q1," he said, according to the transcript. "Last month, we made strategic purchases of inventory, and pulled in supply from our hubs. This drove an increase in our end of quarter DSI (days sales of inventory). We also have teams working with the impacted suppliers to manage our hard drive supply chain, and qualify news sources of supply."