The markets and their murky makers seemed to react too favorably to the second-quarter results Dell posted yesterday, inexplicably just before — and not after — trading halted for the day.
On the surface, there’s not much encouragement to be found in the results. Below the surface, there’s not much that inspires confidence, either.
Yes, Dell is cutting costs, having contracted 40 percent of its manufacturing to third parties. The cost reductions have resulted in better gross margins. Cost cuts, though, don’t help grow the top line, and that’s where Dell will continue to struggle.
The company pointed to sequential revenue growth in a few product categories and market segments, but it cannot deny that, for the fourth straight quarter, it has posted drops in sales and earnings from a year earlier.
Dell says it can resume growth on the strength of a corporate upgrade cycle for PCs. Dell expects that cycle to begin with the release of Windows 7, starting in the USA and then going global.
Says eponymous company CEO Michael Dell:
“The size of the installed base of old hardware has never been greater. I’m here to tell you there’s going to be a refresh cycle next year. It’s not all going to come in the first month or the second month, but over the course of the year.”
I concur, but only to a point.
As Reuters’ Eric Auchard notes, PC refresh cycles have gotten weaker as the justification behind them, the release of new iterations of Microsoft’s Windows, have become less compelling. Dell is counting on corporate CIOs that stuck with Windows XP over the uncertain charms of Windows Vista finally taking the plunge for Windows 7. In some cases, that will happen, but in others it won’t.
For many companies and organizations, economic conditions remain unprecedentedly harsh. Ben Bernanke can tell them happy days are here again, but they won’t believe it until their own fortunes improve. Spending could remain tight, and PCs might not get replaced until they fall apart. If that happens, the corporate upgrade cycle might not be as prompt, sustained, or predicable as Michael Dell would wish.
What about the consumer market? For Dell, it’s just not a strength, and the company doesn’t seem committed to changing the situation. Again, quoting Mr. Dell:
“If current demand trends continue, we expect revenue for the second half of the year to be stronger than the first half. We are expanding our capabilities in enterprise technology and services and investing in or core business to distinguish Dell both with customers and in operating performance.”
Despite distracted and slapdash runs at the consumer space, as evidenced by its strangely half-assed handset for the Chinese market, Dell knows that it has lost the consumer space, that 80 percent of its revenue is derived from the enterprise.
That’s fair enough. Dell’s best chance for redemption lies in the enterprise, not in the consumer sphere.
The key for Dell will be in what it does with its corporate war chest, with the acquisitions it makes in the months ahead. It needs to acquire software and services that will help it capture a bigger share of the efficiency-focused expenditures of enterprise clientele.
Those customers, like Dell itself, are continuing to look for solutions that help them do more with less.