Dell's Finances Show Revenue Decline

Dell on Monday publicly disclosed quarterly financial results for the first time since late 2013, when the company reverted from public to private ownership. The disclosure, which appeared in a regulatory filing to the Securities and Exchange Commission by Dell Holding, owner of Dell, underlines a major question in Dell's blockbuster $67 billion bid to acquire EMC Corp.: how the computer maker plans to pay off the massive debt it must take on to buy the storage company. The deal, announced in October, would create a corporate-computing giant by combining Dell's PC and server sales, primarily to consumers and small to medium-size businesses, with EMC's storage business, which focuses on large corporations. Dell's revenue declined by 6% year-over-year to $14 billion in its quarter ended in July. However, unlike competitors such as International Business Machines and the former Hewlett-Packard, which in November split into separate corporate-computing and PC-and-printer companies, Dell's revenues were up in the company's fiscal year ended January 2015, rising 5%. "Dell has executed well. We've invested wisely to drive growth, and we're pleased with our performance," said David Frink, a company spokesman. Dell has paid off $4.5 billion in debt over the past two years, but those payments left the company with less cash than it had when it traded publicly, and the move to private management hasn't boosted profit. During Dell's fiscal 2015, the company's operating profit totaled $3.2 billion excluding charges. In 2013, that figure was $4 billion. "These numbers reinforce that it is going to be a highly leveraged transaction," said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. He believes that Dell will assume a sizable debt of $51 billion to conclude the deal. "It is no surprise that they're looking to try to sell some assets," he said. Earlier this year, Dell filed for an initial public offering of its SecureWorks division, a business that could be valued at as much as $2 billion. The company is contemplating roughly $10 billion in further divestitures that could include its IT services business, as first reported by the technology website Re/Code and confirmed by a source familiar with Dell's plans. Other possible spin offs include operations of previous Dell acquisitions Boomi Inc., Quest Software Inc., and SonicWall Inc. EMC could sell its RSA Security LLC division to reduce the deal's size, said Daniel Ives, an analyst with FBR & Co. Other tactics to lighten the debt load haven't worked out so well. EMC on Monday scrapped plans to merge Virtustream, a cloud computing division, with parts of VMware, a publicly traded EMC subsidiary. The deal--which was disliked by VMware investors--could have freed up cash for the combined Dell and EMC by shifting to VMware some capital costs of building Virtustream's servers and data centers. Dell also said Monday that although it would focus on paying down debt for the first few years after acquiring EMC, it had structured its borrowing to allow the company to repurchase up to $3 billion of a tracking stock it would create to compensate EMC shareholders for their stake in VMware. A stock buyback would be good news for VMware shareholders, who have seen the value of their shares drop 27% since the acquisition was announced. The filing shows that the combined Dell and EMC would have free cash flow of around $7 billion, enough to give some reassurance to investors worried about the debt, according to Mr. Ives. He added that Dell's financials show "pretty good stabilization." "I think they've done a commendable job on profitability and the all-important free-cash-flow metrics," Mr. Ives said. There may be other stumbling blocks ahead, however. Aside from regulatory and antitrust hurdles, shareholders have filed 13 class-action lawsuits against the companies and directors involved in the deal, and the Internal Revenue Service could hit Dell with an unexpected tax bill over its issuance of the VMware tracking stock, according to the filing. One major roadblock is in the rearview mirror, though. A "go shop" provision that allowed EMC to seek out other suitors expired on Dec. 12. EMC shareholders may vote on the deal as soon as next summer. Write to Robert McMillan at