Dell (Nasdaq: DELL) found a fork in the road (because there is no spoon) and went down the road more traveled.
Years on end of chasing revenue growth at a pittance of a profit margin are giving way to a whole new model in Round Rock. Total sales growth has slowed down to a crawl as second-quarter revenue came in just 1% above the year-ago number. On the other hand, margins are jumping across the board, and non-GAAP earnings of $0.54 per share are a 69% year-over-year improvement.
The thin-margin consumer business remains a significant portion of Dell's sales at 18.5%, but it's the slowest-growing segment in Dell's portfolio. Of course, this transmogrification doesn't happen all by itself, nor is it for free: "We are selling more Dell technologies that bring higher margins, but also require higher levels of R&D and higher selling costs," said CFO Brian Gladden. "These spending increases are deliberate and well-aligned with our transformation."
Investors latched on to those higher costs of running a more profitable business, sending the stock to Dell in a handbasket. On an otherwise upbeat market morning, Dell shares sunk as far as 10.5% as fellow computer seller Hewlett-Packard (NYSE: HPQ) dropped around 5% in preparation for tonight's earnings report.
Never mind that Dell raised earnings guidance -- the sales forecast fell a bit. So we're being asked to decide whether sales or profits matter more. Weirdly, lots of people are siding with sales.
To be clear, Dell is not trying to copy consumer rival Apple (Nasdaq: AAPL) as a provider of top-shelf systems for common people. In that segment, operating margins remain paper-thin, and the expansion happens elsewhere.
Rather, the company is following in the enterprise footsteps of HP and IBM (NYSE: IBM), just like everybody else in the IT industry these days. Having added to its networking, storage, and service powers through a series of acquisitions, Dell is now pushing its data center aptitude at the expense of consumer-side sales.
Good riddance, I say -- Dell should have done this years ago. Need I remind you that IBM's net margin sits at nearly 15% while Dell's remains firmly in the single digits? Stable sales are plenty good enough if you can make the business much more efficient, and that's what's happening here.
In other enterprise-friendly Dell news today, the company just announced a cloud-computing alliance with VMware (NYSE: VMW) and Ubuntu Linux. Learn more about cloud computing and how this paradigm shift can help Dell succeed in a new IT era by watching an informative video The Motley Fool created on that subject. It's short, full of investable wisdom, and totally free -- why not watch it right now?
