Dell’s Q4 Earnings Beat Estimates, Stoke Buyout Debate

Dell reported another quarter with a drop in sales and profits, but its Q4 earnings Tuesday did beat analyst expectations, thereby putting a hotter spotlight on its proposed US$24.4 billion leveraged buyout deal.

The company reported a net income of $530 million, or 30 cents per share, a 31 percent drop from the same time a year ago. Its revenue for its most recent quarter totaled $14.3 billion, down 11 percent from a year earlier.

The drop was not as much as analysts had expected from the struggling PC maker. Every financial report from Dell, however, is now drawing extra scrutiny from shareholders and investors in the wake of its plans to retrench as a private company. That proposal was announced two weeks ago by CEO Michael Dell, who wants to expand enterprise software and services offerings without investor scrutiny.

The deal is subject to shareholder approval, and at least two major Dell stakeholders said they would vote against it if the company couldn’t broker a better offer than the proposed $13.65 per share. Dell refused to discuss the buyout deal in a call following the earnings announcement.

Dell did not respond to our request for further details.

Better Than Expected

While the earnings might have been better than Wall Street expectations, it’s still clear that Dell faces enormous challenges in an evolving market, said Shaw Wu, analyst at Sterne Agee.

“Dell is in a tough fundamental position, sandwiched between low-cost players and Apple and Google encroaching more on the PC business,” he told the E-Commerce Times. “Despite efforts to grow beyond a PC company with multiple acquisitions over the past few years, we estimate 65 to 70 percent of its business is still tied to PCs.”

Dell is not only hurting because of mobile cannibalization, but also because more businesses are allowing their employees to work on a device of their choosing rather than providing office hardware, said Carr Lanphier, analyst at Morningstar.

“Dell knows it is behind in the consumer market, so it’s really trying to sell its new devices to businesses, but due to the bring-your-own-device trend, the market is drying up and really causing Dell’s sales to suffer,” he noted.

The Impact on Buyout Plans

Dell’s moves to increase its mobile hardware aren’t paying off yet, even though the company needs that hardware base to help grow its software line, Lanphier noted.

“We thought mobility would play a bigger role on the quarter, but it really didn’t have that much of an effect at all,” he told the E-Commerce Times. “They came out with this convertible laptop tablet just in time for the holiday, but it didn’t have much of an impact yet. They did have growth in software and networking, which indicates to me that right now they need that installed base of portable mobile devices and personal hardware to run their enterprise solutions software.”

That makes the company’s desire to go private and focus on the long-term software growth rather than hardware sales figures that much more apparent. Investors might think they know what’s best for the company, said Lanphier, but it would be smart to let Dell be the one to make that decision.

“Dell knows what the strategy is and it has the long term in mind,” he observed. “On one hand, investors may be able to look at these earnings and say, ‘OK, you have something going here, let’s get a better deal.’ But on the other hand, you have a market that is literally disappearing, and Dell needs to balance that. They need time to grow through these tough couple of years.”