DELL Dell Inc. (MM)

Dell Inc. (DELL) is scheduled to announce its first quarter 2012 results on May 17, 2011 and the modest revision in estimates reflects changes in the company’s business prospects.

Fourth Quarter Overview

The company reported decent fourth quarter results, with both earnings per share (EPS) and revenues increasing from the year-ago quarter.

Revenues for the fourth quarter were $15.7 billion, up 5.0% from $14.9 billion reported in the year-ago quarter. Revenue growth was driven by an upside in the Enterprise Solutions and Services businesses, coupled with strong commercial client growth arising from Large Enterprise and SMB segments.

Large Enterprise and SMB (Small & Medium Businesses) revenue improved at the same rate of 12.0% compared with the year-ago quarter. Large Enterprise benefited from a year-over-year increase of 5.0%, with server revenue climbing 14.0%.

Similarly, Small & Medium Business revenue server and storage revenues grew 22.0% and 20.0% year over year, respectively, and desktop computers and mobile devices increased 10.0%.

Total sales from the BRIC countries (Brazil, Russia, India and China), which accounted for 13.0% of Dell’s overall revenue shot up significantly by approximately 21.0%.

Gross margin in the quarter was 21.0%, up from 16.6% reported in the fourth quarter of fiscal 2010 and 19.5% reported in the previous quarter. The gross margin expansion was attributed to good supply chain management, decline in component cost, pricing discipline and sales execution, which positively impacted all the business segments of the company.

Dell estimates fiscal 2012 revenue growth in the range of 5.0% to 9.0%, non-GAAP operating income growth in the range of 6.0% to 12.0%, and expects cash flow from operations to exceed net income.

Agreement of Analysts

Out of the thirty two analysts providing estimates for the first quarter, one analyst made an upward revision in the last thirty days. Out of the thirty five analysts providing estimates for fiscal 2012, only one analyst made an upward revision in estimates over the last thirty days while none moved in the opposite direction.

However, for fiscal 2013, one analyst made an upward revision, while one analyst moved in the opposite direction during the same period.

Some analysts lowered their FY12 (Jan) revenue estimates but maintained their EPS estimate for Dell, on the back of lower PC unit growth outlook in 2011. The analysts also believe that 78% of Dell’s revenue is enterprise focused, and the enterprise refresh cycle is helping support PC growth, but only at modest levels.

Analysts believe that on the consumer side, demand has been weak for almost a year. In addition, tablets – most notably Apple Inc’s (AAPL) iPad – have had a negative impact on the PC market, slowing down PC unit growth.

The impact is mostly on the NetBook/low-end category, but analysts also believe that beyond the consumer space, many people are actually adapting the iPads as an alternative option. At a minimum, iPads & tablets seem to be causing many users to defer, if not eliminate, notebook purchases.

We believe that Dell has a reasonably strong cash position and has a cash conversion cycle of negative 32 days. The company ended the fourth quarter with $15.1 billion in cash and short-term investments, improving substantially over the previous quarter. This will help the company to fund its R&D operation, capex and inorganic growth plans through internal accruals.

Magnitude of Estimate Revisions

Since the fourth quarter earnings release, the magnitude of revisions has been modest. Overall, estimates for the upcoming quarter moved up to 43 cents from 34 cents in the last 90 days while the Zacks Consensus Estimate remained unchanged over the past 30 days.

For fiscal 2012, estimates have moved up from 89 cents to $1.69 over the last 90 days. Estimates have gone up by a penny in the last 30 days. For 2013, estimate has gone up from $1.59 to $1.76 over the last 90 days, while it remained unchanged over the last 30 days.

Recommendation

Dell reported decent fourth quarter results, with EPS and revenues increasing from the year-ago quarter. New product launches, a stronger services business, opportunities in the Electronic Medical Record sector, along with the introduction of Dell Streak were the achievements of the year.

Despite its recent strong performance the company is focused on the enterprise segment, whereas growth prospects actually abound in the consumer segment, at least in 2011 and also possibly in 2012. Dell has been unable to take advantage of this growth because it does not have significant competitive offerings in the consumer segment.

However, Dell has benefited from the expanded customer base that resulted from the Perot acquisition. However, stiff competition from Hewlett-Packard Company (HPQ) and Acer concerns us.

The stock has a Zacks #4 Rank, implying a short-term Sell rating.

 
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