Dell Takes a Business Beating

Dell released its numbers late yesterday, and the results are pretty ugly when compared to the same period last year:

• Product revenue was down 25 percent, which might make you wonder if the industry has actually hit bottom, as some companies have speculated.
• Total operating expenses were down 14 percent, but operating income was still down 18 percent, so the company couldn’t scale back spending enough to keep proportional pace with the revenue drop. SG&A took the brunt of cuts with a 15 percent reduction, though R&D was still cut by 12 percent.
• Net income as a percentage of total net revenue remained unchanged at 3.7 percent. But that’s a sad shadow of what the company was able to achieve a number of years ago. The likely cause is that outsourcing vendors, who were having their arms twisted to give up virtually all the profit from their Dell work, according to sources, eventually rebelled, making Dell more on par with other PC manufacturers.
• Revenue was double-digit-down in every single product and service category. The most heavily hit was desktop PCs at a 33 percent drop, which is the result of both a softer market and a shift in consumer preference from desktop to laptop and notebook. The least hit was enhanced services, but even that was down by 11 percent.
• The least affected category of buyer was consumer, with only a 9 percent drop. But large enterprise was down by close to a third, and small and medium business was off by 29 percent.

Taking the six month view, which to my eye is a little more telling, product revenue was down by 26 percent, while service revenue was off by 4 percent. Operating expenses were lower by 15 percent, but operating income was 37 percent smaller. Net product revenue was down by about the same percentages over the six months as in last quarter.

Looking at the balance sheet, Dell has been smart, boosting cash by about $2 billion over the last year, giving it more leverage in making operational choices and in potential M&A activity. Financing receivables hit $2.3 billion, from $1.6 billion. That makes me wonder if the company has been looser in financing standards to keep revenue from sliding even more, or if customers are just paying more slowly. Checking the ratios, we see that days of sales outstanding has gone up from 38 to 42, a 10.5 percent increase, versus the 38 percent jump in financing receivables. So a combination of the two sounds likely: more financing to keep numbers from sinking, and slower payment from those who get it. Another reason for Dell’s increase in cash may be effectively getting unpaid financing from its suppliers, as days in accounts payable has gone from 74 days to 84, or a 13.5 percent increase.