Earnings Preview: DELL Inc. - Analyst Blog

Dell Inc. (DELL) is scheduled to announce its fourth quarter 2012 results on February 21, 2012 and the modest revision in the analysts’ estimates reflect changes in the company’s future business prospects.

Third Quarter Overview

The company reported decent third quarter 2012 results, with EPS of 54 cents beating the Zacks Consensus Estimate of 47 cents.

Revenues in the third quarter were $15.4 billion, which remained almost flat year over year. We believe that lower demand for the company’s products negatively impacted the top line in the quarter. The company is currently focusing on higher-value opportunities and has increased its mix of enterprise solutions and services sales.

Large Enterprise and SMB (Small & Medium Businesses) revenues improved 4.0% and 1.3%, respectively, on a year-over-year basis. Large Enterprise benefited from the strong demand for Servers and Services, which increased 19.0% compared with the year-ago quarter.SMB witnessed lower-than-expected client growth due to muted spending in medium-sized businesses in both the U.S. and Western Europe. 

Gross margin in the reported quarter increased to 22.6% from 19.5% in the year-ago quarter, driven by continued strong product cost execution, disciplined pricing and the ongoing shift to higher value products and solutions.

Moreover, given the uncertain macroeconomic environment and complexity in working through the industry-wide hard drive issue, the company is trending to the lower end of its revenue outlook of 1.0% to 5.0% growth for the full fiscal year.

Agreement of Analysts

Out of the 25 analysts providing estimates for the fourth quarter of 2012, two analysts made downward revisions in the last 30 days, while three made upward revisions during the same period. Out of the 26 analysts providing estimates for fiscal 2012, only one analyst made a downward revision in estimates over the last 30 days, while four analysts moved upward during the same period. For fiscal year 2013, one analyst made downward revision, while four moved in the opposite direction over the last 30 days.

The analysts are of the opinion that management has increased focus on profit maximization, which is evident from the improvement in EBIT despite continued sluggishness in revenues. They also believe that it is a better strategy compared to the adoption of a market share enhancement approach.

Moreover, analysts also believe that the company’s decision to focus on acquisitions such as EqualLogic, Perot Systems, Compellent, SecureWorks and Force10 has helped Dell to venture into new business areas and move away from commodity hardware. Of course, the significant number of acquisitions could give way to notable integration risk.

Some other analysts are of the opinion that the company faces tough competitive challenges as it falls somewhere in between the lower-cost players (Lenovo and Acer) and high-end players like Apple Inc (AAPL). Owing to this, the company is losing market share in the PC business. The PC segment contributes 70%-75% of the company’s total business and any changes in the dynamics of the PC business might affect the company.

Analysts are also of the opinion that Hewlett-Packard Company (HPQ), International Business Machines (IBM), and Cisco Systems Inc. (CSCO) are competing with Dell in the small-medium business (SMB) and server segments. Further, Dell is going through a transition period and taking aggressive steps to transform its business.

Magnitude of Estimate Revisions

Since the third quarter earnings release, the magnitude of revisions has been modest. Overall, estimates for the upcoming quarter have remained unchanged over the last 90 days at 51 cents, while the same for the fiscal year inched up by 1 cent to $2.13. This apart, the estimate for fiscal year 2013 has also increased by 1 cent to $2.05.

Recommendation

Dell reported decent third quarter results, with earnings per share (EPS) exceeding the Zacks Consensus Estimate, but revenues were remaining flat on a year-over-year basis. New product launches, stronger Large Enterprise and SMB revenue, opportunities in the Electronic Medical Record sector and entry into the smartphone domain are positives for the company.

However, competition faced by the company in the SMB and server segment from players like Hewlett-Packard Company, Cisco Systems Inc. and International Business Machines concern us. This apart, a dull European business and lower demand for PCs may affect the business temporarily.

The stock has a Zacks #2 Rank, implying a short-term Buy rating.