Dell Profits Slip 79%, Factions Fight For Control of Company's Future

Dell has been in the news quite a bit of late as major investors like Michael Dell and Carl Icahn battle over the plan to take the company private. The contested plan company CEO Michael Dell proposed several months ago was a reaction to weakness in the PC market, and that weakness has manifested as a nasty drop in Dell's product sales. Dell has been trying to shift its business strategy to compete more with the likes of IBM in enterprise services, and that initiative appears to be going well -- the company increased enterprise revenue by 12% in the first quarter of fiscal 2014, up to $5.5 billion. Infrastructure, cloud, and security services also saw a substantial revenue uptick, to $612M (up 11%).

The ugly news is all on the consumer side. Dell's end-user computing business did $8.9 billion in revenue, down 9%. The drop hit mobile disproportionately -- desktop sales of $3.3 billion were down 2%, while mobile sales of $3.6 billion fell a whopping 16%. In the words of Dell's CFO, Brian Gladden, "Mobility revenue of $3.6 billion was down 16% as demand in the space continues to be pressured by customers diverting spending to alternative mobile solutions. We are encouraged by the industry-based enhancements coming to the notebook touch ecosystem and we will bring new and innovative solutions to the market to enhance our position in this space. We are seeing a good ramp in our tablet based solutions led by our Latitude 10 business focus tablet. "

Mobile sales have typically been a major revenue driver for Dell, but the company's profits in the consumer space were just $224 million on 8.9 billion in sales. That's a 2.5% net profit margin -- the razor-thin edge of razor edges.

Dell's investors had a great many questions about the collapse of the company's margins, and the executives shed some light on why the figures looked the way they did. Asked why the company hasn't been more aggressive on cost-cutting, Gladden responded that "We are just choosing consciously to reinvest those dollars in sales resources and R&D resources in the software business, things that we’ve talked about over time being important to the future of the company."

That's a bit of a turn-around for Dell, which has always emphasized supply-side optimization and minimal overhead costs as opposed to investing heavily in R&D. Gladden further emphasized that Dell wasn't managing the end-user client business on a 90 cycle but had longer-term goals in mind. That's a poke in the eye at quarterly-focused shareholders, who often insist on short-term metrics as the best for managing a company's prospects rather than emphasizing a longer view.

As for Windows 8? Despite Microsoft's upbeat quarter, Dell isn't seeing much demand. The OS was described as "not necessarily the catalyst to drive accelerated growth that we had hoped it would be. We are encouraged by what’s going to play out with new chip sets and some of the work that is going on within the windows ecosystem to hopefully over the next few months create some catalysts. But you look at the recent external data from any of the third party sources, we would expect to continue to see over the next few quarters year-over-year declines in PC demand."

Dell, in other words, doesn't see the traditional PC business rebounding once the tablet fad is over. Evidence suggests he's right; tablets have cannibalized the PC mobile market extremely effectively in the past few years. Transforming its consumer products into tablets that users want to buy is an ongoing process and Microsoft's position in that chain of events seems to vary between partner and boat anchor.

The long-term fight for the future of the company doesn't seem to have changed its sales performance, but it's still unclear if Michael Dell will be able to take it private as he originally planned.