THE WALL STREET JOURNAL.

EARNINGS   |   Updated February 19, 2013, 7:44 p.m. ET

Dell Profit Drops 31%

But Results Support View That Buyout Plan Undervalues Firm

By BEN WORTHEN

Dell Inc. disclosed steep profit and revenue declines Tuesday, but the results were strong enough to bolster investors who say a plan to take the computer maker private undervalues the company.

For the fiscal fourth quarter ended Feb. 1, the company said profit fell 31% and revenue 11%. Still, the results were on the high end of the company's earlier forecast.

Dell said two weeks ago that it had accepted a buyout offer from founder and Chief Executive Michael Dell and others. As a result, some shareholders were suspicious that Mr. Dell and his team wouldn't be motivated to deliver a strong quarter.

"In a management-led buyout there are obvious conflicts of interest," said David Larcker, director of the corporate governance research program at the Stanford Graduate School of Business.

The quarter began while Mr. Dell and his management team were negotiating with the computer maker's board to take the company private. It ended just days before the $24.4 billion deal, valued at $13.65 a share, was announced.

Dell executives declined to discuss the pending buyout on a conference call with financial analysts. Mr. Dell didn't participate on the call because of his involvement in the deal. The company also declined to give current-quarter guidance.

People who were involved in the deal negotiations have said they anticipate shareholders will accept the offer in large part because of the industry-wide decline in PC sales. The final 2012 calendar quarter, which included the holiday shopping season, was among the most disappointing ever for PC sales, with world-wide shipments declining 4.9% from a year ago, according to research firm Gartner.

Dell has been hit harder than most competitors. In the Feb. 1 quarter, its revenue from PCs fell 20% from a year earlier to $6.9 billion. The machines account for 48% of Dell's revenue.

For the last few years, Dell has been tacking away from its reliance on PCs, building out a portfolio of products and services that it can sell to businesses. These include security software, storage systems, networking gear and the like, all of which usually have higher profit margins than PCs.

Brian Gladden, Dell's chief financial officer, said the company was moving forward with that strategy.

In the fourth quarter, sales of the company's servers and networking gear climbed 18% to $2.6 billion. Sales in its storage business dropped 13% to $434 million, while sales of services declined 3% to $2.1 billion.

Overall, Dell said net income for the quarter totaled $530 million, or 30 cents a share, down from $764 million, or 43 cents a share, a year earlier. Revenue was $14.3 billion, down from $16 billion a year ago.

Dell on Feb. 5 agreed to a buyout deal led by Mr. Dell, who owns around 14% of the company, and Silver Lake Partners, a private equity firm. Mr. Dell first approached the company's board about taking the company private over the summer, and negotiations took place throughout the fourth quarter, according to regulatory filings.

More than half of Dell's unaffiliated shareholders will have to approve the deal. So far, holders of about 15% of the shares have said they plan to oppose it, including Southeastern Asset Management Inc., the company's largest outside shareholder, which has said it thinks Dell's value is closer to $24 per share.

A person familiar with Southeastern's thinking said on Tuesday that the firm is focused on the percentage of Dell's profits that come from software, storage systems and other non-PC businesses.

Mr. Gladden said Tuesday that the company's enterprise solutions and services business, which houses many of these products, accounted for "well over half our gross profit."

The person familiar with Southeastern's thinking said this business and other more profitable ones should command a higher multiple than PCs. If Dell were to continue on its current path of fewer PC sales but more sales of software, it could become a smaller but more valuable company, the person said.

Mr. Dell's offer doesn't factor this in. "They are shrewdly playing a hand dealt to them by the PC market," the person said.

Management-led buyouts are complicated because the management team has an incentive that isn't necessarily aligned with shareholders' interests. "It casts everything they do under the light of is this being done to their advantage, whether it's true or not," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Nick Tompras, president of Alpine Capital Research, which owned 2.2 million Dell shares as of Dec. 31, was concerned that management might try to report a poor quarter but was pleasantly surprised by the results.

Mr. Tompras, who is opposed to the current offer, said the results give "shareholders a little bit of a reason to argue for a higher price." He adds: "Why would the founder of the company want to buy back the company if he was pessimistic about its future?"

Dell shares were down a cent at $13.80 in 4 p.m. trading on the Nasdaq Stock Market and up about 1% after hours, when they traded at 30 cents above the current offer price.

Write to Ben Worthen at ben.worthen@wsj.com

A version of this article appeared Feb. 20, 2013, on page B2 in some U.S. editions of The Wall Street Journal, with the headline: Dell Earnings Drop Steeply.