Dell, HP and Salesforce.com Financials – Winds of Change

Dell Inc. announced mixed third quarter 2012 financials as did Salesforce.com Inc., even though the latter firm enjoyed record quarterly revenues. Meanwhile, Hewlett-Packard Co., revealed how challenging a year it had when it reported its fourth quarter and full year 2011 results.

Focal Points:

• Dell reported it had third quarter 2012 revenues of $15.37 billion, virtually flat from last year's third quarter revenues of $15.39 billion. On a GAAP basis, net earnings were $893 million, flat with the year ago quarter. Server and networking revenues were up 13 and 10 percent respectively year over year while desktop PCs and mobility products were down six and two percent respectively for the same period. Software and peripherals also declined by two percent year-to-year. Storage saw a steep decline of 15 percent over the prior year's quarter while Dell's owned storage – EqualLogic and Compellent – saw growth of 23 percent. From a segment view, large enterprise sales grew four percent while public sector revenues declined two percent. The small and mid-sized business (SMB) segment expanded by one percent while the consumer business fell six percent. On the positive front, China revenues jumped 23 percent for the quarter while the BRIC (Brazil, Russia, India, and China) sector overall saw gains of 14 percent. Dell also announced it was investing in R&D at almost a $1 billion annual run rate. 
• Salesforce.com announced it had record third 2012 quarter revenues of $584 million, an increase of 36 percent from the same period last year. On a GAAP basis, the company experienced a net loss of $3.8 million whereas in the previous year's quarter the company had a net income of $21 million. Subscription revenues grew by 36 percent while professional services expanded by 34 percent year-to-year. Company executives raised the revenue guidance for the fourth quarter and projected Salesforce.com would have 2013 revenues of almost $3 billion. 
• HP reported fourth quarter 2011 revenues of $32.1 billion, a three percent decline from the previous year's quarter of $33.3 billion. GAAP net earning fell 91 percent from $2.5 billion to $0.2 billion for the quarter. For the fiscal year 2011 HP grew its revenues by one percent to $127.2 billion from $126.0 in 2010. On a GAAP basis, full year net earnings shrank by 19 percent from $8.8 billion to $7.1 billion. The Personal Systems Group – HP's largest unit – shrank two percent for the quarter year-over-year and three percent for the year to $39.6 billion. The Services division saw two percent growth for the quarter and one percent for the year to $36.0 billion. ESSN (Enterprise servers, storage, and networking) experienced a four percent drop for the quarter but overall annual growth of nine percent to $22.2 billion. Imaging and Printing (IPG) had a 10 percent decline in fourth quarter revenues but was flat for the year at $25.8 billion. HP Software revenues jumped 28 percent for the quarter and 18 percent for the year to $3.2 billion while HP Financial Services had an 18 percent revenue increase for the quarter and the year to $3.6 billion. CEO Meg Whitman stated that commercial and consumer spending was down and given the economic headwinds worldwide she expected it to continue into 2012. She also pointed out that the Thai floods will impact the storage supply chain through the first half of 2012. 

Experton Group believes the global economic slowdown and the expected disk drive supply chain problems will negatively impact Dell, HP and other server and storage hardware vendors' revenues over the next few quarters. In that Dell is still working through transforming its business model the company can be expected to see a few revenue and earning hiccups in 2012. Some segments and geographies will do well but the consumer business and the PC and notebook lines of business will experience soft markets thanks to Apple Inc. tablets and other competition. HP did better than most expected, given all of its internal management problems and poor business moves. The August PSG division announcement did brand damage and impacted HP revenues across multiple divisions. The BCS division, which houses the Integrity server line that uses Intel Corp. Itanium processors and is part of ESSN, saw revenues decline 23 percent in the fourth quarter compared to the previous year's quarter. Part of the reason for the sales slowdown is the Oracle Corp. decision to cease further development and future support for HP Itanium servers. Furthermore, regardless of the outcome of the lawsuits between HP and Oracle, HP concedes its BCS business will continue to decline year over year. HP saw few bright spots this past fiscal year – software and printer-based multi-function printers being the primary ones. For 2012 HP management intends to focus on revenues, earnings per share and cash flow. IT executives can expect HP to attempt to keep their margins up by being more selective on their deals, pursuing a greater share of its customers' wallets, and avoiding deep discounts caused by competitive actions. Experton Group expects the prime price aggressor HP will have to deal with will continue to be Dell. On the other hand, Salesforce.com appears to be a beneficiary of the economic headwinds. Its software and platform as a service (SaaS and PaaS) offerings are appealing alternatives to companies seeking to cut costs, be agile, and/or integrate social collaboration into their business processes. Its third quarter net losses are tied to increased sales costs and stock-based compensation for employees. Company executives claim this is a temporary investment in the future; they may be right. This bump may impact the stock price but it will not have a negative impact on revenues; in fact, the investment should improve the revenue stream. Salesforce.com's strategy is working as planned, regardless of Oracle's attack on Salesforce.com's proprietary cloud model. IT executive will have to deal with the global economic uncertainties and therefore, should examine alternative offerings, push vendors hard for the best agreements possible and ensure they are protected contractually should conditions change for the better or worse.