Earnings estimates for the computing major Dell Inc. (DELL) have taken a nosedive despite the company’s reporting decent fourth quarter 2010 numbers.
Dell reported fourth quarter 2010 EPS of 28 cents, which exceeded the Zacks Consensus Estimate of 27 cents. However, EPS was down 3.0% from the year-ago quarter. The full-year 2010 earnings of $1.05 also declined, dropping 27.0% from the year-ago quarter.
Revenue for the fourth quarter was $14.9 billion, up 11.0% from $13.4 billion reported in the year-ago quarter and up 16.0% from $12.9 billion reported in the previous quarter.
The strength may be attributed to improvement in revenues across all business segments. The commercial business was particularly strong, fueled by growth in Enterprise Technology and an increase in product shipments. The company reported its first consolidated results after the Perot acquisition, which was closed during the fourth quarter.
Dell witnessed revenue increases across its business segments, with Large Enterprise posting revenue of $4.2 billion, an increase of 23.0% sequentially and 8.0% year-over-year. Public revenue brought in $3.8 billion, up 16.0% from the year-ago quarter, while Small and Medium Business revenue for the quarter was $3.3 billion, up 10.0% from the year-ago quarter. Revenues for the Consumer Business grew 11.0% year-over-year to $3.5 billion, with shipments growing 29% year over year and 23.0% sequentially.
This apart, the company witnessed strong business in the BRIC countries (Brazil, Russia, India and China), driven by a strong Chinese business, where revenue was up 72.0% as a result of increases in SMB and Large Enterprise businesses.
2010 Scorecard
Although the fourth quarter results were encouraging, fiscal year 2010 results declined as a result of the dismal performance of the company during the rest of the year, impacted by the global economic turmoil negatively impacting the IT industry. Net revenue for full year 2010 was $52.9 billion, which declined 13.0% from the previous year, while gross profit declined 15.0% year over year and operating income declined 32.0% to $2.2 billion. Margins were under pressure, as gross, operating and net margin declined substantially compared to 2009.
For the full year, commercial businesses which include large enterprise, public and SMB businesses were hit the hardest by the slowdown in the economy. Collectively, the company shipped nearly 5 million fewer units in these businesses, which resulted in a 15.0% revenue decline from 2009.
Cash flow from operating activities for the full year increased by 105.2% to $3.9 billion and cash and cash equivalents increased substantially by 27.3% to $10.6 billion.
During the year, the company delivered comprehensive, user friendly, end-to-end advanced servers, storage systems, networking products, software and management tools, which will help it generate additional business going forward.
Estimate Revisions
Taking their cue from the fourth quarter and full year results, a number of analysts have lowered their estimates in the last 30 days. 13 analysts tracking the stock have lowered their estimates for the first quarter, while 17 have lowered their estimates for fiscal year 2011. Due to these revisions, the current fiscal year 2011 Zacks Consensus estimate dropped to $1.21, 3 cents below the EPS estimated 30 days ago.
Moreover, estimates for the April and July quarters of fiscal year 2011 have also been lowered by 1 cent each.
The company expects the overall PC and server shipments in the industry to be down 10% sequentially in the first quarter. Although the company expects to do better than the industry norms, it still believes that overall revenue will be down sequentially in the quarter.
Although the company has performed better in the last quarter, supply constraints will make it difficult for Dell to achieve substantial growth. The company is witnessing supplier reluctance to add additional capacity until the demand environment among commercial customers improves substantially.
Although the company has witnessed an average negative earnings surprise of 0.60% for the last four quarters, for the April quarter the downside potential will be limited, backed by a revival in IT spending and the general economy. Therefore we maintain our Neutral recommendation on the stock.
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