Dell Profit Missing Estimates Boosts CEO’s Buyout Plan
Dell Inc. (DELL) reported fiscal first-quarter profit that missed analysts’ estimates, underscoring the worsening outlook that led the company’s founder to seek a buyout designed to reinvigorate growth.
Profit (DELL) excluding some items fell to 21 cents a share for the period that ended May 3, from 43 cents a year earlier, Round Rock, Texas-based Dell said in a statement yesterday. Analysts on average had projected 35 cents, according to estimates compiled by Bloomberg. Revenue (DELL) declined 2.4 percent to $14.1 billion, beating analysts’ average $13.5 billion projection.
The plunge in profit lends credence to a plan by Chief Executive Officer Michael Dell and Silver Lake Management LLC to take the company private in a $24.4 billion leveraged buyout. The results also undermine the case made by billionaire investor Carl Icahn, who says investors will want to keep a stake as Dell shifts toward providing products and services for data centers.
“The Icahn solution gets less attractive, and the bird in the hand looks better than the one in the bush,” said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco, who has a hold rating for the shares.
Dell declined less than 1 percent to $13.40 at the close in New York. The shares have advanced 32 percent this year, compared with a 17 percent gain in the Standard & Poor’s 500 Index.
The Dell-Silver Lake group is offering to acquire the company for $13.65 a share. Icahn is arguing that Michael Dell is trying to buy the company cheaply and that shareholders would be better served by his proposal, which contends that Dell’s PC business “is far from obsolete” and the company has “great potential for growth.” Icahn and partner Southeastern Asset Management Inc. plan to offer $12 a share in cash or stock to investors, while also letting them retain stakes in the company.
“They’re continuing to revise down profitability and cash flow, and the prospect of owning a stub becomes less attractive,” Whitmore said. “Cash looks a lot better.”
Southeastern said its stake in Dell was unchanged in the first quarter, according to a filing yesterday.
Whichever proposal prevails, last quarter’s results demonstrate the challenges Dell’s management will face. PC shipments in the first quarter fell 14 percent -- the worst decline since IDC began tracking data in 1994. In enterprise computing, Dell faces competition from Cisco Systems Inc., International Business Machines Corp. and Oracle Corp.
Dell’s net income for the first quarter tumbled 80 percent to $130 million, while analysts on average had projected $499.7 million. PC-related revenue, including software and accessories, fell 9 percent to $8.9 billion, and the unit’s operating income was down 65 percent to $224 million.
Microsoft Corp. (MSFT)’s Windows 8 operating system, released last October and aimed at reigniting PC sales lost to smartphones and tablets, is “not necessarily the catalyst to drive accelerated growth we thought it would be,” Tom Sweet, Dell’s corporate controller, said in a conference call yesterday.
Dell’s sales this year are expected to be less than they were in 2006, and net income may be about where it was in 2003, according to analysts’ estimates.
“The timing is perfect for Michael,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor. “It bolsters his claim that his offer is not the lowball many stockholders think it is.”
Dell’s board has predicted another year of lackluster growth in 2014, and an adviser, Boston Consulting Group Inc., concluded several acquisitions “had yielded far lower returns” than management anticipated, according to a March 29 filing.
Some of those merged businesses didn’t perform well in the latest quarter. Data-storage sales fell 10 percent, services revenue grew just 2 percent and the company’s software group posted an operating loss, partly on higher sales and product development spending, Chief Financial Officer Brian Gladden said during the call.
“These transformations are difficult and take a while, but they have the assets to do it,” said Maynard Um, an analyst at Wells Fargo Securities in New York. “It makes more sense to go private. Being a private company out of the public eye, if they have to get aggressive on pricing to win strategic accounts and accelerate R&D spending, they can do it without scrutiny.”
Some big Dell shareholders are curtailing their stakes in the company. T. Rowe Price Group Inc., which had opposed the Michael Dell-Silver Lake deal, disclosed in a filing yesterday that it sold 12 percent of its stake in Dell in the quarter.
Blackstone Group LP, which was weighing its own buyout offer for the company, withdrew from the process in April after conducting due diligence that led it to conclude the computer maker’s enterprise solutions business was years away from competing meaningfully, said a person familiar with the matter.
There were bright spots in the quarter. Revenue from enterprise hardware, including computer servers, storage devices and networking gear, rose 10 percent to $3.1 billion in the quarter. Dell is gaining server share while reaping higher average prices, Gladden said.
Michael Dell’s turnaround plan is predicated on boosting PC investments, pushing deeper into emerging markets, and swiping market share in servers from Hewlett-Packard Co. Still, Dell needs to be more effective at pairing sales of storage and other enterprise products with those servers, according to Whitmore.
“If they don’t have public shareholders they have to keep happy, they can be aggressive on price to get share, which is very accretive in services, networking and storage,” Whitmore said. “If anything, Dell’s only going to push harder on share.”
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