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Dell reported a 4.8% drop in fourth quarter earnings last week, suffering from squeezed margins on personal computers. Investors responded by initially pounding the company’s shares on Friday. But what can we learn from the news?
First, as suspected, netbooks are having a big effect on personal computers. Dell is a pretty big player in netbooks, and, in fact, has one of the most popular models - the Dell Inspiron Netbook. But Dell isn’t making a lot of money on netbooks, and as noted in an earlier blog (LINK), the low price of netbooks (some good models can be had for less than $300) are lowering the overall price expectations of consumers.
A survey by online retailer PriceGrabber.com found that the average price of products in its laptop category in December 2009 was $645, a 20% drop from the $808 average a year ago.
Still, investors were disappointed in Dell for more than just squeezed margins. They seem to be worried that the company may be losing market share, most notably to rival HP.
On a segment basis, here’s how Dell stands:
• Large enterprise revenue was up 8% in the quarter on a year-over-year basis to $4.2 billion, while operating income was $281 million, also an 8% improvement.
• In the small and medium business segment, revenue was up $3.3 billion or 10%. Dell says the gains were driven by stronger sales of mobile products and servers.
• Consumer revenue was $3.5 billion, an 11% increase over the year ago time period. Shipments actually increased 29%, revealing just how much lower prices are affecting revenues.
• Public sector revenue – driven largely by the company’s acquisition of system integrator Perot Systems – was up 16% in the quarter to $3.8 billion. Dell said revenue from contracts with government and healthcare customers was particularly strong.
In a conference call with analysts, Dell Chairman and Chief Executive Michael Dell said the company was beginning to see demand improvement in the commercial segments of its business, and that could help out in the margin area where price pressure isn’t as strong.
“Businesses are spending with a lot more conviction at this point in the year than they were at this point in time last year,” he said. “We feel like we’ve been chasing demand, and we’re feeling like we are starting to get out in front.”
At the moment, Dell’s overall financial picture is cloudy. However, its decision to purchase Perot and broaden its revenue base definitely appears to have been a smart move. In fact, the company may look to further shield itself from squeezed margins on the PC front this year by making another large or several smaller system integrator purchases.
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