Dell's Q3 profit slides 54%

Dell reported third-quarter profits that were down 54% from this time last year, though the company said it was encouraged by a slight uptick in sales from the prior quarter.

Dell's net income for the three months to Oct. 30 was $337 million, or 17 cents per share, down from $727 million, or 37 cents a share, in the same quarter last year, the company said. Revenue declined 15% to $12.9 billion.

Sales were down from last year in all of Dell's main business units, including the large-enterprise division, where revenue dropped 23%, and the small-and-medium-sized business segment, where revenue fell 19%.

Still, Chief Financial Officer Brian Gladden said Dell saw some “encouraging signs” and that business had started to improve in some commercial markets. Sales in its enterprise and small-business segments, while down year-over-year, were up sequentially for the first time in seven quarters, he said.

“While we've been talking about demand stabilizing in prior quarters, we're now seeing signs of improvement in some markets, including key commercial markets worldwide,” he said during a call with reporters.

Still, the results were poorer than expected. Dell's profit before one-time charges was 23 cents per share, below the 28 cents per share financial analysts had forecast, according to Thomson Reuters. Its revenue also came in below Wall Street's target.

Dell was in need of a strong quarter after its main rival, Hewlett-Packard, released preliminary profit numbers last week that were better than expected. HP's earnings before one-time charges were $1.14 per share, up from $1.03 a year earlier, while revenue dropped 8% to $30.8 billion, the company said. HP will report its full results on Monday.

Dell has also been struggling in the PC market, where it has slipped to third position in the worldwide rankings behind HP and Acer, according to IDC. Dell depends more heavily than its rivals on the business sector, which cut spending sharply amid the recession.

Desktop shipments were down 15% in the quarter, with revenue falling more steeply because average selling prices were lower. Laptop shipments increased by 5%, but revenue fell there too, Dell said.

The company also faces pressure in the data center, following HP's news last week that it will acquire networking vendor 3Com for $2.7 billion, and Cisco Systems' entry into the blade-server market earlier this year.

Dell is moving to diversify its own business. It is trying to build a bigger business in IT services with its $3.9 billion purchase of Perot Systems, and it has partnered with Brocade and Juniper to resell their networking equipment. Two years ago it bought storage vendor Equalogic for $1.4 billion.

It is also trying to move into the smartphone business with last week's launch of the Mini 3, based on Google's Android OS. The phone will be sold initially in China and Brazil, but a version may eventually come to the U.S. and Europe.

Dell will give an update on Dec. 16 about its plans for Perot Systems, Gladden said. “With Perot Systems we expand Dell's services into hosting, consulting, application development and business process outsourcing,” he said.

Perot gets most of its business today from the U.S. health care sector, but Dell hopes to expand it to new industries and other countries, CEO Michael Dell said on the call.

He expects the release of Windows 7 will lead to a “pretty powerful” PC refresh cycle over the next 18 months, and he said that the overall PC market could grow next year by a percentage rate “well into the teens.”

“I can't remember a time when a very high%age of [business customers] skipped an entire operating system,” Dell said. Windows XP is now eight years old, he said, and businesses need a modern OS to use technologies like desktop virtualization.

With the uptick in spending from some corporate customers, Dell expects its fourth-quarter revenue to be higher than that of the quarter just ended.

The results pushed Dell's stock lower on the after-hours markets. Its shares were trading at $14.90 at the time of this report, down 6% from Thursday's close.