Dell: Q3 misses, cites 'difficult global IT spending'

Dell's third quarter earnings and sales fell short of expectations amid "a difficult global IT spending environment." Nevertheless, the company said it was encouraged by early interest in its Windows 8 touch products.

The company reported third quarter earnings of $475 million, or 27 cents a share, on revenue of $13.72 billion, down 11 percent from a year ago. Non-GAAP earnings were 39 cents a share.

Wall Street was expecting Dell to report third quarter earnings of 40 cents a share on revenue of $13.9 billion. Going into Dell's third quarter report, analysts expected weak PC sales potentially offset by server revenue.

Dell saw revenue declines across all of its business units. Large enterprise was off 8 percent in the third quarter; public revenue fell 11 percent; SMB fell 1 percent; and consumer sales tanked 23 percent.

By product line, servers and networking and services had the best performance in the quarter with flat revenue.

As for the outlook, Dell said the "challenging global macro-economic environment" will persist into the fourth quarter. The company expects fourth quarter revenue to be up 2 percent to 5 percent from the third quarter. Dell added that it expects to hit non-GAAP earnings of $1.70 a share for the fiscal year. 

CFO Brian Gladden and CEO Michael Dell, however, cited progress in its transformation. Gladden said that Dell's new servers were selling well and the company is "encouraged by early interest in our new Windows 8 touch portfolio and the opportunities it creates for our commercial and consumer businesses."

On Dell's third quarter earnings conference call, Steve Felice, chief commercial officer, said:

With the launch of Windows 8 we have new tablets and convertibles including the XPS 10, XPS 12 and latitude 10. In addition we have to touch enabled all-in-one desktops. While it is too early to share specific demand numbers we're encouraged by the initial customer interest in our touch enabled computing.

The catch is that the consumer business for Dell is now showing a loss. Dell's operating loss in the third quarter was $65 million.

The argument for Dell to stop pitching consumers is likely to become stronger largely due to relative strength in the enterprise. Server and networking products showed strength. 

Dell, like other tech giants, is also struggling in emerging and growth markets. Revenue in Brazil fell 13 percent in the third quarter and 29 percent in India. Globally, Dell is struggling.

By the numbers:

• Mobility revenue fell 26 percent in the third quarter and is not performing to Dell's expectations, the company said.
• Desktop revenue fell 8 percent in the third quarter.
• Services backlog was $15.8 billion in the third quarter, up 2 percent from a year ago. Trailing 12 months new contract signing down 6 percent to $1.8 billion.
• 12G servers were two-thirds of server revenue. Server revenue overall in the third quarter was up 4 percent due to hyper-scale systems.
• Large enterprise revenue in the third quarter was $4.16 billion, down 8 percent from a year ago. Operating income for the quarter was $325 million.
• Public revenue in the third quarter was $3.82 billion, down 11 percent from a year ago. Operating income was $352 million.
• SMB sales in the third quarter was $3.28 billion, down 1 percent from a year ago. Operating income was $349 million.
• Research and development spending was $270 million, up 23 percent from a year ago. As a percentage of revenue, Dell's R&D spend was 1.9 percent of revenue, up from 1.4 percent a year ago.