Dell Results Underscore Challenges Facing Turnaround Plan

Dell Inc. reported results that underscore the challenges facing the company amid a decline in personal-computer sales, whatever the outcome of a vote next month on Michael Dell’s $24.9 billion plan to go private.

Net income for the fiscal second quarter fell 72 percent to $204 million, or 12 cents a share, from $732 million, or 42 cents, a year earlier. Revenue for the quarter ended Aug. 2 was little changed at $14.5 billion. Analysts on average predicted profit of $275 million on $14.2 billion in sales.

The plunge in earnings bolsters the case made by Chief Executive Officer Dell and Silver Lake Management LLC that shareholders should accept their proposal to restructure Dell as a private company. While sales were helped by rising demand for servers and networking gear, the deteriorating state of Dell’s main business may deflate the case of billionaire activist shareholder Carl Icahn, who is arguing in Delaware court that he should be allowed to appoint directors, in order to keep Dell public and profit from his stake.

“They did surpass very low expectations but the year-over-year comparisons aren’t promising,” said Jayson Noland, an analyst at Robert W. Baird & Co. who rates the shares neutral, the equivalent of a buy. “The PC market continues to trend below expectations. It will play into Michael Dell’s plea to take the company private.”

Dell Proposal

Shares of Dell were little changed in extended trading after the report from $13.71 at the close in New York. That’s just below Dell and Silver Lake’s $13.75-a-share offer price, indicating shareholders will back the leveraged buyout after a special committee of Dell’s board accepted a sweetened offer by the group two weeks ago.

Profit excluding some items was 25 cents a share, compared with analysts’ average 24-cent estimate, Dell said in a statement today.

Dell and Silver Lake are proposing a dividend of 13 cents a share on top of an already-increased $13.75-a-share bid for the computer maker to boost their odds of winning shareholder support. They also said shareholders would receive an 8-cent-a-share third-quarter dividend regardless of when the deal closes.

Investors holding the stock as of Aug. 13 will now be eligible to vote on the deal, and abstentions will no longer be counted as votes against the deal, a key sticking point for Dell and Silver Lake before the amended deal.

Shareholder Positions

Icahn is asking a Delaware judge to bar Dell, the third-largest PC maker, from setting a new shareholder record date; to stop Michael Dell and his affiliates from voting any shares acquired since Feb. 5, the day the deal was announced; to stop the company from changing voting requirements; and to find that the board breached its fiduciary duties.

Icahn held 156.5 million shares of Dell valued at more than $2 billion as of Aug. 1, putting his stake of the company at 8.9 percent, according to data compiled by Bloomberg. Michael Dell is the largest shareholder with 15.6 percent.

Dell’s investor base has shifted to a makeup that could also boost Michael Dell’s bid. Hedge-fund managers almost tripled their holdings of Dell in the second quarter, to 18 percent as of June 30 from 6.5 percent as of March 31, while traditional mutual-fund firms cut their stakes, according to holder reports filed as of yesterday with the U.S. Securities and Exchange Commission.

“The certainty of Michael Dell and Silver Lake’s cash offer is more compelling than the risk and reward of holding equity and warrants with questionable value,” Brian Marshall, an analyst at ISI Group, wrote in a note. “This quarter’s results did little to change our view of Dell’s medium- or long-term prospects. The basic circumstances and choices remain unchanged.”

PC Demand

Dell and other PC makers are being stung by a slump in shipments, which have fallen for a fifth straight quarter. Second-quarter shipments dropped 10.9 percent to 76 million, according to market researcher Gartner Inc. Dell gets more than half its sales from desktops, laptops and related products, which are being replaced for many consumer and business uses by tablet computers including Apple Inc.’s iPad.

Dell’s end-user computing revenue, which includes PCs and “thin client” computers for back-office workers, declined 5 percent to $9.1 billion. Sales in the enterprise solutions group, which includes servers, storage and networking products, rose 8 percent to $3.3 billion.

Corporate PC demand will probably pick up in the second half, while consumer demand remains suppressed, Noland said. Lenovo Group Ltd. has also been aggressive on pricing and is willing to lose money in markets outside of China, increasing competition for Dell, Noland said.

Hewlett-Packard Co., the No. 2 PC maker, is scheduled to report fiscal third-quarter earnings on Aug. 21.

Dell was originally scheduled to report earnings on Aug. 20, and moved its report up because of heightened interest in the company, according to David Frink, a spokesman for the company. It issued no forecast for the third quarter, which ends in November, and won’t hold a conference call for analysts.

Before it's here, it's on the Bloomberg Terminal.