DELL Dell Inc. (MM)

Dell Inc. (DELL) delivered third quarter 2012 EPS of 54 cents, handily beating the Zacks Consensus Estimate of 47 cents. Following the earnings release, the company’s share price dipped 0.51% to $15.55 in the after hour trade.

Revenues

The third largest personal computer maker in the world reported total revenue of $15.36 billion in the reported quarter, almost flat compared with the year-ago quarter level. We believe that lower demand for the company’s products negatively impacted revenues in the quarter. The company is currently focusing on higher-value opportunities and has increased its mix of enterprise solutions and services sales.

Revenue by Segments

Large Enterprise posted revenues of $4.5 billion, up 4.0% year over year. The improvement in revenue was aided by strong demand for Servers and Services, which increased 19.0% compared with the year-ago quarter. Services revenue also witnessed a 14.0% increase. This apart, the company reported Enterprise Solution and services revenue of $1.9 billion.

Public Revenue was $4.4 billion, down 2.0% year over year. Enterprise solutions and services revenue was $1.6 billion. The reduction in revenue was due to the weakness in U.S. Federal business and Western Europe. In the U.S. Federal department, the company experienced seasonal fiscal revenue growthin September. However, the company witnessed slower spending pattern in the month of October.

Small and Medium Business revenue spiked 1.3% to $3.7 billion. The segment witnessed lower-than-expected client growth due to muted spending in medium-sized businesses in both the U.S. and Western Europe. The channel inventory challenges still persist, most importantly in the European region as some of the competitors are aggressively moving out of the channel, thus resulting in increased competition in inventory management.

Consumer Business revenue declined 4.0% to $2.8 billion, as the European business stabilized. However, the Asia-Pacific witnessed robust growth, while the Americas business declined as the companies continue to exit the unprofitable low-value segments.

Operating Results

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.

Operating income stood at $1.14 billion or 7.43% of revenues in the reported quarter, up 15.5% year over year. The improvement in the product mix, which includes some high margin products, aided the company’s operating performance.

This apart, decent margin from the SMB business also boosted the operating performance. The Consumer business margins expanded both sequentially and year-over-year despite the persistent challenges during the quarter.

GAAP earnings in the quarter were 49 cents per share compared with 42 cents a share in the year-ago quarter. Excluding special items like amortization of intangibles, severance and facility consolidation cost, acquisition-related costs, as well as income tax adjustments, earnings per share in the quarter was 54 cents, up from 45 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Dell’s cash conversion cycle was negative 31 days versus negative 34 days in the previous quarter. Cash flow from operations declined to $851.0 million from $2.4 billion reported in the year-ago quarter. The company ended the quarter with $13.3 billion in cash and short-term investments versus $14.6 billion in the previous quarter.

Guidance

The company expects to exceed its operating income guidance of 17.0% to 23.0% for fiscal 2012. Moreover, the uncertain macroeconomic environment and complexity in working through the industry-wide hard drive issue, the company is trending to the lower end of the range of its revenue outlook of 1.0% to 5.0% for the full fiscal year.

Outlook

Dell reported decent third quarter results, with earnings per share (EPS) increasing from the year-ago quarter while revenue remaining flat. Dell’s flat revenue can be ascertained to the uncertain economic condition, coupled with the shortage in the hard disk supply. Moreover, the recent flood in Thailand has added to the problem of the HDD supplies.

However, efficient cost control, streamlined operations and better product mix has resulted in a better operating performance. This apart, opportunities in the Electronic Medical Record sector and entry into the smartphone business are positives for the company. On the other hand, the company lowered its revenue forecast for the upcoming fiscal year ending January. However, stiff competition from other tech majors such as Hewlett-Packard Company (HPQ), Apple Inc. (AAPL)and Acer may pose some challenges to the company.

Dell has a Zacks#3 rank, implying a short-term Hold rating.

 
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