The Dell surprise: Higher earnings on lower revenue

Amid all the bad economic news, including a downturn in PC market growth projections for 2009 by nine points, who would have thought the company best suited to weather the storm could be one that just emerged from a storm?

You may not have to look to the end of the tunnel for signs of light today. In a clear demonstration that Mark Hurd is not the only fellow who can shape up a company to emerge from scandal unscathed and healthy enough to tackle a fresh new year of hell, yesterday was the day of Michael Dell.

With three percent lower revenue than in a quarter already dubbed one of Dell's worst, Dell Computer eked out earnings per share that were 9% higher than Q3 2007 -- now at $0.37 per share. Net income rose 18% over a terrible fiscal Q2 2008, and were only down 5% overall over last year.

The numbers truly are gratifying: $15.1 billion in revenue for the quarter ending in October, down just 3% annually. Gross margins remain lousy but stable, with slight growth even there, to close to 19%. But operating expenses are down by 8%, due in large part by having let 2,200 more employees go in the previous quarter. For those thousands, it's a terrible holiday season; but for Dell Computer, the news could have been so much worse.

How is Dell pulling it off? First, as became evident during yesterday afternoon's quarterly conference call with analysts, the company is pushing harder toward selling higher-margin profits to bigger businesses, with the fastest growing segment being storage.

"Over the last four quarters," stated new Dell CTO Brian Gladden, "our mix of revenue and profit in our commercial business has improved with over a third of our revenues now coming from higher margin products like storage services and software peripherals." (Our thanks to Seeking Alpha for the transcript.)

In the commercial sector, sales in almost every segment were down, leading to a 14% decline in shipments and 8% decline in revenue. The reasons are no shock to anyone. Even as the company transitioned to a promising new Latitude notebook design for businesses, sales there still declined 4%. US sales declined somewhat more than European sales.

But the Asia Pacific region saw growth commercially, with operating income from the China, Japan, and Southeast Asia climbing a tremendous 60%.

And believe it or not, Dell's biggest comeback this quarter -- at the worst possible time for everyone else -- was its biggest or second biggest weakness all through 2006 and '07: the consumer division. Taking a gamble by outsourcing more production and moving support personnel back to the US, where taxes are much higher, unit shipments to the consumer segments rose an astounding 32% over the previous year's fiscal Q3, picking up revenue by 10%. Feeling the full effects of the economic storm, American consumers -- of all people -- are saving Dell Computer.

Does this mean the company is gaining market share, especially against the current market leader HP? CEO Michael Dell told one analyst he's not keeping score on that count, at least not now. "I think that we'd like to gain share, sure we'd like to gain share," he remarked, "but we're more focused on having solid profitability. I don't think we really know what the growth of the industry's going to be next year. We're planning a pretty conservative set of assumptions on the belief that it's easier to dial it up than to dial it down."