US tech companies have had a very sound earnings season. Revenue growth has
been robust and companies’ outlooks have been reassuring.
Dell, alas, has broken the trend: its shares fell 10 per cent on Wednesday
after its quarterly update included a cut to revenue growth guidance for the
year, from high to low single-digit per cent expansion.
Alarming
This seems alarming inasmuch as Dell reports relatively late and so gives a
more up-to-date window into demand for information technology.
But the reduced revenue expectations for growth should not have surprised
anyone. Management attributed all of the softness to demand weakness from US
consumers and the US federal government.
Any company with exposure to these two groups can expect some pain in the
quarters to come, but this should do little to spook companies entirely
focused on corporate customers such as Oracle and IBM. (Hewlett-Packard,
however, with its large consumer computer business, may be a different
story: its shares fell in sympathy with Dell’s.)
Margins
What happens to margins at Dell over time may have wider implications. While
the company increased its expectations for operating income growth for the
year, the new outlook still implies that operating margins will be lower (at
about 7 per cent) in the second half of the year, relative to the first
(slightly shy of 9 per cent).
Profit growth over recent quarters has been driven by margin expansion
accompanying Dell’s move away from the consumer. The tech industry as a
whole has enjoyed an impressive run of margin expansion since 2001,
according to Bloomberg data.
If Dell proves unable to continue its margin growth story, despite a change in
strategy, that may suggest that after a decade, parts of the industry are
approaching an inflection point.
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