NEW YORK (CNN/Money) -
Dell's lackluster earnings and outlook left investors distinctly unimpressed Thursday.
Dell (up $0.19 to $29.21, Research) shares dipped slightly in after-hours trading after the world's number one PC maker reported third quarter earnings and revenues that were in line with lowered Wall Street forecasts and issued sales guidance that disappointed some investors.
The company forecast fourth quarter revenue of $14.6 to $15.0 billion and earnings per share of $0.40 to $0.42. The midpoint of that range is below Wall Street analysts' predicted revenues of $14.97 billion for the current quarter.
Dell reported third-quarter earnings, excluding one-time items, of 39 cents a share, up 18 percent from a year ago and took a one-time charge of $442 million, or $0.14 per share, related to repairs of one of its computer systems as well as costs related to job cuts. The PC maker reported revenues of $13.9 billion. The charge caused its net income to decline 28 percent, down to $606 million from $846 million, from the year-ago quarter. Both revenues and estimates were in line with Wall Street estimates, which were revised lower last week.
On a conference call to analysts, Dell executives would not discuss the company's revenue growth prospects beyond the current quarter.
"This was the chance for them to, if they had the confidence about where they are going next year, to begin pointing in that direction, but they clearly refused," said Mark Stahlman, an analyst with Caris & Company. "I think there are a lot of unknowns for them."
Barry Mills, vice president and senior research analyst with the Boston Co. Asset Management, noted that the guidance isn't as strong as it could have been since the fourth quarter has an extra week because of how the holidays fall in relation to Dell's fiscal year this year.
"They do have an extra week; that's a lot of extra revenues," said Mills, whose firm owns shares of Dell. Mills was unimpressed with the guidance, adding, "If you back out that week, it's kind of a flat number."
Dell CEO Kevin Rollins said he does not think the extra week will have much of an impact, as most of Dell's fourth-quarter sales are related to the holidays and therefore fall in the first part of the quarter, while the three extra days fall in February, a low-sales month for the company.
Jim Fisher, vice president and portfolio manager with Univest Wealth Management & Trust, a Pennsylvania money manager running $1 billion in assets, was more positive on the guidance, noting that the high end of the range is in line with consensus forecasts.
Dell had record shipments of 9.2 million units worldwide in the third quarter and boasted 36 percent revenue growth in its enhanced services division, which offers IT consulting services, as well as a 35 percent revenue increase in its data storage division. Laptop shipments rose 38 percent in the quarter, while desktop shipments, which are lower margin than laptops, fell 2 percent.
Is Dell's consumer model broken?
Weakness in Dell's U.S. and U.K. consumer businesses led the company to issue a lower forecast for the third quarter but Dell CEO Kevin Rollins said the company made some moves to address problems in its consumer business, during a conference call with reporters.
"The U.S. consumer business didn't grow that fast this quarter, but it's still a great business," said Rollins, noting that the company has made some moves to make the U.S. business more efficient, including consolidating the home and small business sectors. The company also cut about 1,000 jobs in the quarter, some of which were due to the consolidation of those sectors.
Dell's consumer market troubles came to light in the second quarter, when the company missed revenue expectations and delivered lower-than-expected guidance, on sluggish government sales and because Dell discounted low-end products too aggressively to battle competitors. Both Hewlett-Packard and Gateway have been pushing low-priced systems more aggressively.
"After the second quarter, we took a hard look at execution and made changes to balance our pricing and product range," Rollins said on the call. "We implemented improvements to increase efficiency and drive lower operating expenses, and we focused resources to improve customer support. We are already seeing results including the consolidation."
As part of that balance, Rollins said the company is hoping to achieve a higher proportion of higher-margin customers. The launch of Dell's souped-up XPS line during the third quarter was one move to address that.
But Rollins pointed out that Dell's focus as a company has always been on the corporate and enterprise markets. He noted that the company realized in the second quarter that it needed to work on getting more high-end customers, which it hopes to do with its XPS line.
But some investors don't have much faith in Dell's consumer business.
"I feel the consumer model is broken for a lot of reasons," said The Boston Company's Mills. "The consumer side has been their headache; they've had documented troubles on the customer service side."
On the bright side, Fisher, whose firm owns shares of Dell, said he was particularly pleased with growth in Dell's servers and storage divisions, as well as its overseas growth.
Sales outside of the United States rose 20 percent from a year earlier, led by rapid expansion in China, which reported unit growth of 46 percent.
"Their international growth still looks very good to me," Fisher said. "There has been a lot of talk about how they are losing a competitive edge to other PC manufacturers overseas, but I look at storage and servers, and I think to see growth in those areas and overseas is important."
Investors on the fence
Dell's continued revenues misses have nicked its shares. Dell closed today at $29.21, down from above $41 in July. The shares have traded in a 52-week range of $ 28.67 to $42.57.
Said Univest's Fisher, "I've been in a holding pattern with Dell, waiting to see if the stock is going to turn around. I don't know if this quarter is enough for the stock to turn around, but the numbers are decent."
But Fisher added that the company has missed revenue targets for consecutive quarters, which gives him pause, and added that he may decide next quarter whether to fish or cut bait.
Caris does not own shares of Dell, and his firm does not do banking business with the company.