Dell sales miss projections on server weakness

Dell Technologies Inc shares dipped after reporting sales that fell short of Wall Street estimates, with weaker demand for the company’s servers overshadowing profit that beat projections.

Revenue in the fiscal first quarter gained 2.6% to $21.9 billion from $21.4 billion a year earlier, the Round Rock, Texas-based company said Thursday in a statement.

Analysts projected $22.3 billion, according to data compiled by Bloomberg. Shares fell more than 4% in extended trading.

After assembling a technology empire that sells everything from servers to networking software, chief executive officer Michael Dell has turned his attention to integrating the pieces.

The company hopes collaborations across business units will bring customers from one unit to another and drive higher sales and profit, particularly for Dell’s lower-margin hardware businesses. One example is the company’s new offering that lets clients manage and maintain corporate PCs with a blend of Dell services and VMware Inc. software.

Demand for Dell’s servers and networking gear fell 8.8% in the period – a dramatic reversal from the double-digit sales growth the company’s infrastructure unit has seen for more than a year.

“The server business is tough in China,” Tom Sweet, Dell’s chief financial officer, said in an interview. “We saw all these large opportunities that did not make sense to us from a profit profile, and we decided that business was not business we wanted.”

Dell’s business in China generates a high single-digit percentage of the company’s total revenue, Sweet said. Some customers in the country are delaying orders because of the US-China trade war, but Sweet said Dell was “well positioned” to deal with the tariffs that have already been planned.

Shares fell to a low of $63.20 in extended trading after closing at $66.41 in New York. The stock has increased 57% since returning to the public markets in late December.

Earnings, excluding some items, were $1.45 a share in the period ended May 3. Analysts, on average, estimated $1.20 a share.

Dell reaffirmed its annual sales outlook of $92.7 billion to $95.7 billion in fiscal 2020, including VMware. Sweet said the company was “trending toward the midpoint” of the forecast. The range suggested sales growth of 2.3% to 5.6% compared with fiscal 2019, when the company’s revenue jumped 15% – a climb that Dell has described as an anomaly.

Sales in Dell’s infrastructure business unit, which includes servers and storage hardware, declined 5% overall to $8.2 billion in the period. Storage revenue fell 1%.

Revenue from the PC unit in the quarter increased 6.2% to $10.9 billion, with corporate sales rising 13% amid Dell’s efforts to provide more subscription services for its PCs. Companies are also buying new Dell machines to upgrade to Windows 10 operating systems. Falling component prices have aided the profit margin of the division, which accounts for about half of the company’s revenue.

Dell has been trading at a lower market capitalization than the value of its parts, including more than 80% ownership of VMware. That reflects investor concerns about the company’s $48.6 billion in long-term debt and its exposure to the hardware market, which is affected by the cyclical forces of the economy and the US-China trade conflict. Dell said it paid down about $400 million of debt in the fiscal first quarter.

Read: Dell projects revenue boost as it aims to win support to go public

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Dell sales miss projections on server weakness