Can Dell Carve a New Path to Profit?

by Cynthia Wilson | February 22, 2012 4:27 pm

In yet another sign that the PC’s best days may be behind it, computer maker Dell (NASDAQ:DELL[1]) announced after the market close on Tuesday that earnings for its fiscal fourth quarter dropped 18%. The company, based in Round Rock, Texas, said it earned $764 million, or 43 cents a share, during the period. In the year-ago period it earned $927 million, or 48 cents a share.

Of greater concern to investors, though, is that the world’s third largest PC maker—behind Hewlett-Packard (NYSE:HPQ[2]) and Lenovo (PINK:LNVGY[3])—said it expects revenue in the current quarter, ending April 1, to sink about 7% below the just-completed quarter’s $16 billion. That’s about $100 million less than analyst were expecting.

Naturally, the market wasn’t happy, and it sent Dell’s shares down 5% in late trading on Tuesday. A confluence of factors has come into play here. PC sales were hurt by flooding last year in Thailand that shut down production of disk drives and increased component prices. That led more consumers to turn to Apple’s (NASDAQ:AAPL[4]) iPhone and the iPad tablet, as well as Amazon’s (NASDAQ:AMZN[5]) Kindle Fire, and Barnes & Noble’s (NYSE:BKS[6]) Nook during the holiday period.

The downward trend for PC sales, however, was well underway once consumers became accustomed to having a computer in their pocket. That’s one reason HP said at one point last year that it would eventually stop making computers and mobile devices to focus on software—a strategy it has since reversed.

Many analysts expect PC sales will deteriorate even further this year as government agencies cut jobs to deal with budget deficits and consumers and businesses replace PCs with smartphones and computer tablets for personal entertainment and business use on the go. According IDC, smartphone sales topped PC sales for the first time last year, with 487.7 million smartphones shipped versus 414.6 million PCs shipped. The worst part for Dell investors is that the company has not yet rolled out any products of consequence to offer customers in the smartphone or computer tablet market. Meanwhile, Hong Kong-based Lenovo, which overtook Dell as the No. 2 PC maker worldwide, has. The Lenovo IdeaPadA1 starts at $224 and its higher-end ThinkPad starts at $408, according to CNET.

Dell is hoping to get into the tablet game when Microsoft (NASDAQ:MSFT[7]) releases its Windows 8 software later this year. The software is being designed for both touchscreen and computer keyboard control. Dell says it wants to release a Windows 8 tablet later this year for corporate customers, and in fact companies that are accustomed to working with the Microsoft Office suite of tools, and those that want more-secure control of company information stored on the devices, may be willing to wait for Dell to come through. Dell also plans to release a consumer tablet by year’s end.

But in the technology world, six months is practically a lifetime, and many of the consumers and businesses Dell hopes to attract may soon pursue other options.

  1. DELL:
  2. HPQ:
  3. LNVGY:
  4. AAPL:
  5. AMZN:
  6. BKS:
  7. MSFT:

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