Don’t bank too soon on Dell PC refresh

August 28, 2009

   By Eric Auchard
Dell computers on sale in Beijing computer market   LONDON, Aug 28 (Reuters) – Dell Inc’s quarterly earnings report beat investor expectations that have been repeatedly hammered down. But the computer maker’s celebrations could be short-lived.
   Results for the second-quarter ending in July were buoyed by transient business factors as it continued to lose share in its core PC business. Meanwhile, technology budgets are still being slashed and the company’s business, which depends heavily on personal computers, is unlikely to be an early beneficiary of any corporate spending rebound that could begin in 2010.
   Government computer spending saved the quarter for Dell as public spending surpassed sales to its mainstay large commercial customers for the first time. However, this was largely due to seasonal education demand from state and local governments. Sales to corporate customers and small and medium-sized businesses remained weak, falling 32 percent and 29 percent respectively.
   It is a measure of Dell’s battered condition that a fall in government sales of just 16 percent and consumer sales of 9 percent were seen as positive factors. The Texas company was alone among the top five PC makers to lose market share in the second quarter compared to the same period a year earlier, market research firm Gartner Inc says.
   For the current third-quarter, government spending will have to offset expected weaker corporate spending, especially in the United States and Europe.
   Hopes for Dell’s stock rest on the potential for the next generation of Microsoft operating system software — Windows 7, due out in October — to spur on a wave of computer upgrades next year. The average corporate PC is now 4.5 years old. As PCs represent a far larger chunk of Dell’s sales than for other computer manufacturers, it stands to be the biggest beneficiary of any spurt in new sales.
   But there are doubts whether Windows software has the same pulling power that it did a decade ago in terms of sparking hardware upgrade cycles as corporate buyers control spending more tightly these days.
   Another problem is that corporations and governments will need to put additional computer servers, storage and software in place before any major PC upgrade cycle gets underway.
   CEO Michael Dell is convinced that “a big refresh cycle” is underway over the course of the next year. The question is when: It could be 2011 before any broad PC upgrade begins to flow through into company results.
   Despite all these questions, Dell’s shares are up more than 10 percent after the report. The stock trades at a 15.5 multiple to Wall Street’s 2010 earnings forecasts, in line with the computer hardware sector, but roughly 40 percent higher than multiples of healthier, more diversified rivals Hewlett-Packard <HPQ.N> and IBM <IBM.N>. A big comeback in the company’s fortunes looks priced into the stock.
   Yet Dell still needs a major transformation of its business model to attract more software and services revenue (See July 22 column “A brutal logic to Dell’s reinvention”).
   It must show progress in winning back consumers, while cutting its overall PC exposure before anyone can call Dell a turnaround.
   — At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can find some of Eric’s recent columns here. —

(Photo: Reuters/David Gray)

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