Dell’s Shares Tumble After Sluggish Consumer PC Spending Weighs on Revenue

Dell Inc. (DELL), the second-largest personal-computer maker, fell the most in almost three years on the Nasdaq Stock Market after slower spending on PCs and consumer technology crimped its sales forecast.

The company projected sales growth of 1 percent to 5 percent this year, down from a previous range of 5 percent to 9 percent. Second-quarter sales rose less than 1 percent to $15.7 billion, Round Rock, Texas-based Dell said yesterday. Analysts had estimated revenue of $15.8 billion in the period, which ended July 29, according to Bloomberg data.

Lackluster demand from consumers and market-share gains by Apple Inc. (AAPL) weighed on results, offsetting stronger corporate orders for server computers. Households have stepped up purchases of tablets and smartphones, while curtailing purchases of PCs, Dell’s mainstay. Renewed concerns that the economy will fall back into recession also may be curbing spending.

“The macroeconomic environment has weakened not only here in the U.S., but globally,” said Shaw Wu, an analyst at Sterne, Agee & Leach Inc. in San Francisco. He has a “neutral” rating on the shares. “The guidance is definitely disappointing, and that’s the main reason why the stock’s off. The Street already had some skepticism that the numbers were too high.”

The stock dropped $1.60, or 10 percent, to $14.20 at 4 p.m. New York time. That was the biggest decline since October 2008.

‘Uncertain Demand’

In cutting its full-year revenue forecast, Dell cited “a more uncertain demand environment” and a strategy shift aimed at boosting sales of higher-margin products. Government customers also have delayed spending. The public sector accounts for more than a quarter of Dell’s sales.

Even as Dell tempered its revenue outlook for the year, it said operating income would increase by as much as 23 percent, up from a previous forecast of up to 18 percent. Acquiring technology for data centers and discontinuing sales of less profitable products have improved results, executives said.

On a conference call yesterday, Chief Executive Officer Michael Dell said the company would keep making acquisitions and maintain its focus on midsize business customers.

“You’ll see us continue to identify opportunities in a disciplined way that will generate profitable growth,” he said.

Run of Acquisitions

The company has been making deals to expand in data storage, networking and software. On July 20, Dell announced plans to buy networking company Force10 Networks Inc., which it said had about $200 million in sales.

Dell’s second-quarter net income rose to $890 million, or 48 cents a share, from $545 million, or 28 cents, a year earlier. Excluding some costs, profit was 54 cents a share. Analysts had projected 49 cents.

Sales of storage products declined 20 percent, following the decision to end Dell’s agreement to resell products from EMC Corp., the biggest producer of storage computers. Still, revenue from Dell-owned storage technology grew 15 percent last quarter.

The consumer business, meanwhile, has been a struggle, said Chief Financial Officer Brian Gladden.

“We’ve seen weakness there and it’s become even more challenging recently,” he said. “The enterprise side of the business is executing well.”

Apple’s Mac computers and iPad tablets are selling to small and midsize companies, in addition to consumers, cutting into Dell’s market share, said Sterne Agee’s Wu.

Not Trivial

“If you add those two segments together, the impact on Dell isn’t that trivial anymore,” Wu said. About 45 percent of Dell’s business is susceptible to inroads by Apple, he said. “Apple is definitely having an impact on the small and medium business market.”

The overall PC industry saw lower-than-expected shipments last quarter, market researchers said in July. Global shipments climbed 2.6 percent, IDC said, just shy of the 2.9 percent it had forecast. PC sales in the U.S. slipped 4.2 percent.

Apple, whose Mac sales have benefited from the popularity of its iPhone and iPad mobile devices, bucked that trend. It saw shipments grow almost 15 percent in the U.S. last quarter, making it the country’s third-largest PC seller, with 10.7 percent of the market, IDC said. Hewlett-Packard Co. (HPQ) was the largest supplier, with Dell coming in second. Hewlett-Packard reports its quarterly results tomorrow.

Dell is planning new tablet computers that use either Android and Microsoft’s Windows 8 operating system, due next year. The company’s current Streak tablets, which use an older version of Android, have only found niche customers, Dell executive Stephen J. Felice said in June. The company has discontinued a version of the Streak with a 5-inch screen.

Google Inc.’s $12.5 billion acquisition of Motorola Mobility Holdings Inc., announced this week, also may increase competition. The deal makes Google a rival to Dell in hardware markets, including Android devices.

“We’re still quite interested in Android,” Dell’s CEO said. And the company’s early work developing a tablet running Windows 8 “looks to be pretty encouraging,” he said.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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