What Carl Icahn Will Find To Love In Dell's Dismal Q2 Numbers

Billionaire investor Carl Icahn is nothing if not a pragmatist. So, expect him to look at Dell 's latest quarterly results, gloomy as they are, and find some reason why he wants to own the business along with other public shareholders.

Icahn and his supporters have long pointed to Dell's enterprise business as the real crown jewel of the company, rather than the PC business that once made Dell into a tech giant. Why? Because the only part of Dell's business that still seems on solid footing. For example, in the second quarter, sales in the enterprise solutions group--servers, storage and network products--increased 8% to $3.3 billion. And right on cue, a spokesman from Icahn's top ally, Southeastern Asset Management, said, "We are once again encouraged by the strong performance in the enterprise business."

Here's something worth noting: while the enterprise segment is a lone bright spot, it doesn't contribute much bottom-line juice. The enterprise business' operating income was $137 million, a figure lower than both the services and PC units' profit number.

Along with enterprise sales, the group of investors trying to scuttle the $24.9 billion management-led buyout will point to the surprising amount of free cash flow that Dell generated. The PC-maker had $1.5 billion, 83 cents a share, in free cash flow in the quarter, and by Southeastern's calculations, Dell threw off $2.22 a share in free cash flow over the past year. Southeastern argues that Dell's cash-flow strength reinforces its belief that Dell is short-changing investors--and should increase the buyout price.

What isn't disputed by the company or Icahn is the terrible state of the computer business. Revenue from end-user computing (the PC part of the business) dropped 5% to $9.1 billion. In addition, it was far less profitable: operating income decreased 71% to $205 million. Worse still were the results from the software business: it reported a quarterly loss. And looking broadly, Dell's company-wide quarterly profit fell by 72% to $204 million, 12 cents a share.

Of course, Dell isn't the only aging firm caught going the wrong in the shifting currents toward gadgets like Apple 's iPad and Google's Android smartphones--a distinct flow away from old-style PCs. Indeed, second-quarter PC shipments dropped 10.9% to 76 million, according to Gartner, a decline that underscores the fundamental change in appetite.

The industry-wide malaise is key to Dell's argument that a turnaround will be best done as a private company--and that billionaire CEO Michael Dell and private-equity shop Silver Lake Partners are indeed offering a fair price. Icahn doesn't believe this, and he'll continue to argue his case right up until next month's shareholder vote on the buyout.

Reach Abram Brown at abrown@forbes.com.