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Dell Drops to Three-Year Low as Forecast Misses Estimates

Dell Inc. (DELL) tumbled to the lowest price in more than three years after forecasting a fourth straight quarter of declining sales, a sign that a slump in demand for personal computers will persist.

The stock dropped 7.3 percent to $8.86 in New York, for the lowest close since March 10, 2009. Fiscal fourth-quarter revenue will be $14 billion to $14.4 billion, the Round Rock, Texas- based company indicated in a statement yesterday. That’s less than the $14.5 billion average estimate of analysts, according to data compiled by Bloomberg. Revenue was $16 billion a year earlier.

Dell, the No. 3 PC maker, is struggling as companies wait to upgrade machines and consumers turn to smartphones and tablets like Apple Inc.’s iPad and iPhone. Even as Chief Executive Officer Michael Dell works to mitigate the decline by adding storage, networking gear, software and services through acquisitions, the company still gets half its sales from PCs, and it won’t quickly get relief from the release of a new version of Microsoft Corp. (MSFT)’s Windows operating system.

“They’ve been talking about changing the last five years,” said Shaw Wu, an analyst at Sterne Agee & Leach Inc., who has a neutral rating on the shares. “They’re in a very tough position, plain and simple.”

Dell has lost 39 percent this year, compared with a 7.5 percent gain in the Standard & Poor’s 500 Information Technology Index.

PCs Languish

PC shipments tumbled 8.3 percent in the calendar third quarter from a year earlier, according to market researcher Gartner Inc., and are projected to decline this year for the first time since 2001, according to IHS iSuppli. Dell has spent more than $12.7 billion on 18 acquisitions since 2009, adding corporate data center products to lessen its reliance on PCs.

Today, the company said it bought software maker Gale Technologies for an undisclosed sum, adding tools to help companies expand in cloud-computing.

Sales in Dell’s fiscal third quarter, which ended Nov. 2, fell 11 percent to $13.7 billion, less than analysts’ average estimate of $13.9 billion. Fourth-quarter revenue will rise 2 percent to 5 percent from the prior period, the company said in the statement.

Third-quarter profit before some items fell to 39 cents a share, compared with analysts’ average 40-cent estimate. Net income dropped 47 percent to $475 million, or 27 cents a share, from $893 million, or 49 cents, a year earlier, the company said. Desktop and laptop PC revenue declined 19 percent to $6.65 billion.

Servers, Networking

Sales of Dell’s servers and networking gear fared better. Revenue in that product group rose 11 percent from a year ago to $2.32 billion, buoyed by strong demand for Dell’s PowerEdge servers, new machines that have the ability to attach to faster network connections, Chief Financial Officer Brian Gladden said on a conference call with analysts.

Sales of servers designed for large cloud-computing applications rose 126 percent from a year earlier, CEO Dell said on the call.

In the PC market, Dell’s touch-screen tablet computers running Windows 8 -- Microsoft’s new version of its flagship PC operating system tailored for tablets and touch-screen PCs -- have been another bright spot, Gladden said in an interview.

“There are some parts of the business that are actually doing well,” he said.

Windows 8

Still, Windows 8 hasn’t yet provided a boost for PC makers since its introduction last month, in part because corporate customers aren’t rushing to upgrade. Gladden said Windows 8 won’t affect Dell’s results in the next two quarters.

“The client business continues to be challenging,” he said. “Commercial customers tend to be lagging adopters of a new operating system. They’re going to wait.”

In addition, Microsoft released its first computer -- a tablet called Surface that can function like a laptop -- putting the software company in competition with PC makers such as Dell.

“The threat right now is minimal, but that’s only because the unit number is small,” said Richard Shim, an analyst at market researcher NPD DisplaySearch. “But when you look at the potential for it to disrupt partners, it’s pretty big.”

On top of the stagnating PC market, superstorm Sandy may have pared $500 million to $700 million from Dell’s third- quarter revenue, according to a Nov. 8 research note from Abhey Lamba, an analyst at Mizuho Securities USA who has a neutral rating on Dell shares. The storm struck the East Coast in late October, closed U.S. stock markets for two days, and may have caused as much as $20 billion in economic damage and losses.

Brian White, an analyst at Topeka Capital Markets in New York, wrote yesterday in a note to clients that Dell’s operating profit, which declined 31 percent in the third quarter, may have “bottomed,” auguring well for its stock price.

“The stock has limited downside from current levels as we expect value investors will be attracted,” wrote White, who recommends buying the shares.

To contact the reporter 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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