Dell Earnings: Big Jump in Revenue and Profits, Consumer Sales Lag

Dell (DELL) had a strong third quarter, with revenue up 19 percent year over year to $15.4 billion. Many are calling this the turnaround that Dell has been waiting for, but there are still significant areas of concern in the details.

Even with a 144 percent growth in net income, net earnings were 5.3 percent of net revenue, a bit behind competitor HP (HPQ), which, in its last quarter, saw 5.7 percent. One reason should be that it's a lot harder to make as much margin for corporate sales as it is off consumer products. Both Dell and HP have been riding a rebound in corporate sales -- which is still likely fueled by all the normal replacement that companies put off for a couple of years during the economic slump.

However, consumer products is the division where Dell currently lags, both in revenue and profit. The category grew year-over-year only 4 percent, versus that 19 percent for all revenue, 27 percent for large enterprise, 20 percent for public (government), and 24 percent for small and medium business. Plus, the operating income for the consumer division was zero. Break-even was a fine sight better than last quarter, when the division lost $21 million, but a wipe-out compared to the same time last year, which saw operating income of $10 million. Granted, that's pathetic on nearly $3 billion in revenue. Still, the company, once known for its lean-and-mean operations, is currently struggling.

Part of this is undoubtedly the economy, in which consumers seem to be having a far harder time than large businesses. It's one reason why Dell has wanted to expand into higher margin consumer goods like smartphones, only Dell had to cry uncle earlier today and eradicate the mobile division. So forget any quick turnaround on that front.

Another bad sign is in services, which will be critical for a Dell or HP as hardware prices continue to drop. Dell saw a 34 percent year-over-year growth in services net revenue -- but a 42 percent jump in cost of revenue for the category. It's another critical area that is moving in the wrong direction.

Also, that 19 percent growth in net revenue required the same in operating expenses -- and that included a 21 percent year-over-year hike in selling, general and administrative. That's another way of saying salaries, depreciation, facilities, and marketing. In other words, overhead. So Dell may also need to head that off at the pass.

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• Dell and HP: Good News in the Quarter Is a Bad Omen for the Economy
• Michael Dell: It Is Time For You to Go