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Dell profits slump 72 per cent

Dell profits slump 72 per cent

Dell's profits have plummeted an incredible 72 per cent in its latest quarter, despite flat revenue, as the company feels the pinch of the slowing PC market.

PC maker Dell, currently in the process of attempting to leave the stock market and go back to being a privately-held company, has reported a massive drop in profits for its second financial quarter.

Taking the brunt of the continuing slump in world-wide PC sales, thanks to an in-hindsight foolish decision to abandon its smartphone and tablet product lines in favour of concentrating on its core competencies of PCs, laptops and servers, Dell's latest financial statement makes for painful reading. In the second financial quarter, the company's net income was just $204 million - 72 per cent lower than the same quarter.

While a 72 per cent drop in profit is painful, the story gets interesting when compared to revenue: over the quarter, Dell took $14.5 billion, which is almost identical to the same period last year. In other words, Dell's sales are almost unchanged - but its profit margin has taken a major hit as the company is forced to focus on volume shipments of low-cost, low-margin devices.

A clear example of the impact of the continuing decline in traditional PC sales, Dell's decline can be directly traced to its decision to ditch smartphones and tablets. Its rival Lenovo, in its own most recent filing, boasted of a 23 per cent increase in profits - thanks, in no small part, to a whopping 105 per cent revenue boost in its tablet and smartphone division.

Investors are taking Dell's news in their stride, however. While the announcement itself caused a panic-selling dip in the share price, by the close of trading the value had stabilised just 0.11 per cent down - although this increased to 0.4 per cent in after-market trading. The reason seems clear: Michael Dell's plan to buy back all public shares and take the company private, which promises a bumper payday for investors if they stick around for the papers to be signed.

17 Comments

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coyote 16th August 2013, 11:22 Quote
This could well be an overstatement, but it seem many companies have reported low profit figures lately. This seems to tally with Microsoft going wayward ? Does anyone else feel this might be a big part of it ?
Especially when we see headline like of this:

"Most voted posts on Microsoft forums: How to uninstall Windows 8"
rollo 16th August 2013, 11:25 Quote
Pc desktop / laptop market is close to dead with people just replacing what breaks and not upgrading. Once people are given a reason to upgrade it may pick up again but windows 8 was not the reason most wanted.

Most of dells cash comes from sales to big business who have been spending less on IT now for years.

The fact that after all is said it still made a profit is good for it. They also won't have shareholders soon as it will be back a private company again.
Corky42 16th August 2013, 15:20 Quote
IDK how all this stock n shares stuff works, but if its being taken back to being a private firm, does that mean the lower the stock price the better for Michael Dell.
And to abandon its smartphone and tablet product lines seems dumb, what reasons did they give for doing that ?
rollo 16th August 2013, 15:33 Quote
They have already agreed to pay a set price for the shares. Does not matter what it drops by. If it dropped in half they might reno but as it is they are not going to quibble over a few cent.
Gareth Halfacree 16th August 2013, 15:38 Quote
Quote:
Originally Posted by Corky42
IDK how all this stock n shares stuff works, but if its being taken back to being a private firm, does that mean the lower the stock price the better for Michael Dell.
No: the investment group led by Michael Dell has already made its offer, which values the company at $24.9 billion. If the share price drops between now and the buyout, the investment group is arguably overpaying; if it rises, the investors are the ones who get the shaft.
Quote:
Originally Posted by Corky42
And to abandon its smartphone and tablet product lines seems dumb, what reasons did they give for doing that ?
It was a different era: its Streak 5 smartphone and Streak 7 tablets never sold well, and the only company who was really making any inroads against Apple's iPad was Amazon with its subsidised Kindle Fire family. Rather than continue to thrown money into what it saw as a losing proposition - bear in mind that Dell was also a big player in PDAs, which were killed when smartphones came along - Dell decided to leave the market to others and concentrate on its traditional markets.

Then, of course, Android got really rather good. Companies that had stuck with it, like Samsung, started to make money hand over fist - but it was too late for Dell to go back, as it would take too long to revise its unpopular Streak series to compete against the market leaders. It was a gamble, pure and simple: had smartphones and tablets proven a fad, or if Android had died on its arse, Dell would have come out looking very smug indeed.

And just in case you think Dell is the only company making that sort of stupid decision: look at HP, which paid $1.2 billion for PDA pioneer Palm only to cancel its entire product line and leave the tablet and mobile market - a market it is now, at great expense, re-entering. Even Lenovo, which is sitting pretty on boosted mobile profits, has its own story of stupidity: in 2008, when things looked bad for the mobile market, it sold its tablet and smartphone division for $100 million; less than twelve months later it signed an agreement to buy it back for $200 million. Seemed a daft move at the time, but it's certainly paying off now.
Corky42 16th August 2013, 19:45 Quote
I guess fixing a price when going back to a privately owned firm is normal then, still confuses me though (easy to do) :D isn't stock price a reflection of what the company is worth? so the market says its worth xxx but the guys wanting to buy it to go private say its worth a different amount :?

Still think it seems odd for Dell to drop the Streak 7. Sure it has a awful battery life compared to the iPad, but with Windows 8 just around the corner and the history Dell had with laptops, i would have thought they would have kept going.
John_T 17th August 2013, 11:12 Quote
Quote:
Originally Posted by Gareth Halfacree
Quote:
Originally Posted by Corky42
IDK how all this stock n shares stuff works, but if its being taken back to being a private firm, does that mean the lower the stock price the better for Michael Dell.
No: the investment group led by Michael Dell has already made its offer, which values the company at $24.9 billion. If the share price drops between now and the buyout, the investment group is arguably overpaying; if it rises, the investors are the ones who get the shaft.

True, but only to an extent.

Dell has only made an offer, it hasn't been accepted yet - and his first offer was rejected. It could be argued that if the share price drops it makes his offer seem more tempting and more likely to succeed, whereas if the share price rises it makes his offer less generous, and therefore harder for him to get the required percentage of shareholders to agree to go private. I forget off the top of my head what percentage of shareholders need to agree a deal to compel the rest to sell to go private, but it's very high, (high 80's / low 90's I think).
John_T 17th August 2013, 11:44 Quote
Quote:
Originally Posted by Corky42
I guess fixing a price when going back to a privately owned firm is normal then, still confuses me though (easy to do) :D isn't stock price a reflection of what the company is worth? so the market says its worth xxx but the guys wanting to buy it to go private say its worth a different amount :?

It's pretty straightforward really - you're pretty much there! :)

The share price is a reflection of what the company is worth, (generally speaking). It's the price some of the shares trade hands at - so when there are more buyers than sellers, the price goes up, and when there are more sellers than buyers, the price goes down. The price will bob up and down depending on what people think of the company: how it's performing, how they think it will perform in the future, how it compares to other companies in the same sector, etc, etc.

The thing is though, it's usually only ever a small(ish) number of shares changing hands during a day's trading, so it's actually quite difficult to gauge its true value. Bankers buy and sell shares in the same day trying to make a profit on the difference, but most shares will be held by long term investors who hold the shares for months or years at a time - it's these people Dell will have to persuade to sell. In order to try and persuade them, he offers them more money than they can sell their shares for on the open market.

It's a bit like if you have a car and I want to buy it off you. Your car may be worth, say, £5,000. This is based on what other, similar cars sell for. If you are looking to sell your car then great, I offer you £5,000 and we're both happy. But, if you're quite happy with your car and don't feel the need to sell it, then I have to offer you more than you think it's worth to tempt you to sell it to me. I might offer you £5,500, but if you like your car and can't see the point of selling it, you'll still turn me down. So I have to go away and think about it for a bit, then come back and make you a better offer, say £6,000 - at which point I hope you'll think that's too much money to turn down.

That's basically where Dell is at the moment. He has to offer a big enough premium to tempt people to sell, but not so much he overpays and wastes his money.
Xir 19th August 2013, 09:14 Quote
A small contradiction maybe?
Quote:
Taking the brunt of the continuing slump in world-wide PC sales
Only to be followed by:
Quote:
In other words, Dell's sales are almost unchanged

So, the PC market isn't as dead as said, the grey corporate boxes are still beeing shifted.
It's just not a lucrative as it used to be...
Gareth Halfacree 19th August 2013, 09:43 Quote
Quote:
Originally Posted by Xir
A small contradiction maybe?
No contradiction: as the article says, the slowdown in PC sales has meant that Dell - and others in the market - have had to slash profit margins and concentrate on high-volume, low-margin sales. Had the PC market not been in the doldrums, prices - and margins - could have been kept high. To put it another way: Dell's efforts have resulted in a bigger share of a smaller pie, with the two cancelling each other out to equal flat revenue (but a cliff-like drop in profits.)
Xir 19th August 2013, 15:09 Quote
The point is, there is still high volume in the PC-market, not a drastic "slump"
Corky42 19th August 2013, 16:05 Quote
People may not be buying PC's like they used to, but its not like they are throwing them in the bin. The graphics market was up by 4.6% in Q2 2013, admittedly not as much as was predicted (7.2%) but the figures show it not all doom and gloom.
Xir 20th August 2013, 07:41 Quote
Ah, the power of scaling :D
LightningPete 21st August 2013, 01:12 Quote
Dell PCs are not as competitive than they used to be. And over bloated still with 'bloatware' when you first get them. They just cant get to grips with lower profit margins as PC saturation takes hold. Its boring for most people and tablets/mobiles can do almost everything including wiping peoples rear ends (if only!) But Dell doesnt seem to give us the impression that its aware of this at all...
Xir 21st August 2013, 09:48 Quote
Buy the corporate ones..no bloatware, docking stations, 2nd charger, no probs...
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