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Market Update

PCs Continue to Bring Down Dell

Despite the firm's increased focus on enterprise solutions, weak PC sales and overseas demand hampered overall results and will continue to do so, says Morningstar's Michael Holt.


 Dell (DELL) reported disappointing first-quarter results, as the firm struggled to deal with weak demand in Europe and stiff headwinds facing the PC market. At this point, we don't expect to change our fair value estimate, but if our outlook for the PC market deteriorates, we will consider a modest adjustment downward. We were already modeling a gradual decay in the firm's operating margin, but if results continue to deteriorate on an accelerated basis, we will make the necessary adjustments to our forecast.

Total revenue of $14.4 billion was down 4%. This is below our expectations, and nearly 6% below management's forecast from the previous quarter. PCs were a key source of weakness, with PC revenue down 6% year over year as Dell struggled against aggressive pricing in emerging markets, and weak demand as tablets become a more popular substitute. There's little evidence yet to suggest that ultrabooks are an effective weapon for Dell against tablets, and now the firm is holding up its upcoming line of Windows 8 tablets to stem the damage. We remain skeptical. Within PCs, laptop sales were the hardest-hit, down 10% from the first quarter of fiscal 2012. Dell's gross margin of 21.3% reflects continued struggles, with PC pricing more than offsetting the benefit from a product mix-shift  to enterprise solutions.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.