Dell Inc. (DELL) is scheduled to announce its third quarter 2012 results on November 15, 2011 and the modest revision in analysts’ estimates reflect changes in the company’s future business prospects.
Second Quarter Overview
The company reported decent second quarter 2012 results, with EPS of 54 cents beating the Zacks Consensus Estimate.
Revenues in the second quarter were $15.7 billion, up 1.0% from $15.5 billion reported in the year-ago quarter. The company has currently shifted its focus to high-margin Enterprise Solutions and Services business. Moreover, the company has also realigned its strategy to focus on three solution domains including next generation computing solutions and intelligent data management, services, security and cloud and end-user computing.
Large Enterprise and SMB (Small & Medium Businesses) revenue improved 1.0% and 5.0%, respectively, compared with the year-ago quarter. Large Enterprise benefited from a 1.0% year-over-year spike, with server revenue climbing 5.0% and 11.0%, respectively. Consumer Business revenue inched up 1.0% to $2.9 billion, driven by strong growth in EMEA and APJ, partly offset by lower revenues from the Americas.
Gross margin in the reported quarter increased to 23.3% from the year-ago level of 17.4% driven by continued strong product cost execution, disciplined pricing and the ongoing shift to higher value Dell technologies products. During the quarter, the company continued to eliminate lower-margin businesses, thus diverting from the company’s long-term growth target.
Dell raised its non-GAAP operating income growth expectation for 2012 to 17.0%-23.0% from the earlier guidance of 12.0%-18.0%. Based on strategic decisions to redirect resources from lower-to-higher value solutions and a more uncertain demand environment, the company also lowered its full-year revenue outlook to 1%-5% from the previous range of 5.0%-9.0%.
Agreement of Analysts
Out of the 33 analysts providing estimates for the third quarter of 2012, six analysts made downward revisions in the last 30 days, while none of them made any upward revision. Out of the 23 analysts providing estimates for fiscal 2012, only one analyst made an upward revision in estimates over the last 30 days while five moved in the opposite direction. However, for fiscal 2013, seven analysts made downward revisions, while none moved in the opposite direction.
Some analysts believe that Dell was in confusion for most of the quarter. This apart, the analysts’ interpretation of the IDC data also suggested that Dell did not benefit as much as expected due to some weakness in demand. In fact, IDC estimated that Dell’s worldwide PC units declined approximately 2% in 3Q.
The analysts also expect Dell to be selective in pursuing low-margin business, favoring profitability and cash flow over growth. It will be interesting to see how long management holds on to its 5.0% PC margin growth target in the back drop of eroding market share.
Some analysts expect the recent catastrophe in Thailand that will impact the hard disk drive (HDD) supply situation to have a minimal impact on units and revenue, although it is likely to affect Dell’s gross margin if the latter chooses not to raise prices or if it fails to offset its bill of materials. Prices charged to tier-one OEMs are also expected to increase by 10.0% or more, which could lower the gross margin by 50-75 bps and non-GAAP EPS by approximately 4 cents per quarter.
Magnitude of Estimate Revisions
Since the second quarter earnings release, the magnitude of revisions has been modest. Overall, estimates for the upcoming quarter moved down to 26 cents from 28 cents in the last 90 days while the same declined by a penny over the past 30 days.
Estimates for fiscal 2012 have moved down from $1.01 to 99 cents over the last 90 days and have decreased by a penny in the last 30 days. For 2013, estimates have gone down from $1.18 to $1.12 over the last 90 days.
Recommendation
Dell reported decent second quarter results, with earnings per share (EPS) and revenues increasing from the year-ago quarter. New products, stronger public segment revenue, opportunities in the Electronic Medical Record sector and entry into the smartphone domain are positives for the company.
On the other hand, the company lowered its revenue forecast for the upcoming fiscal year ending January. The uncertain demand environment induced the company to lower its previous outlook. This apart, the recent floods in Thailand may also affect Dell’s margin as it may affect the supply side of the business. Moreover, stiff competition from Hewlett-Packard Company (HPQ) and Acer concern us.
The stock has a Zacks #3 Rank, implying a short-term Hold rating.
DELL INC (DELL): Free Stock Analysis Report
