Dell Inc. (DELL) reported second quarter fiscal 2011 earnings per share (EPS) of 29 cents, below the Zacks Consensus Estimate of 30 cents.
Revenues
Revenues for the second quarter of fiscal 2011 were $15.5 billion, up 21.7% from $12.8 billion reported in the year-ago quarter and up 4.4% from $14.9 billion reported in the previous quarter. The company’s second quarter revenue growth may be attributed to strength across all business segments (other than consumer) and to the integration of the financials from the recently acquired Perot Systems.
Additionally, the strong global commercial demand, specifically in servers and networking storage and services, also had a positive impact on the results of the company.
Revenue by Segment
Large Enterprise posted revenues of $4.5 billion, an increase of 38. 5% year over year. This growth is mainly attributable to a 34.7% increase in server revenues and a 57. 2% increase in services revenue. Server revenues were fueled by the rapid growth in blades, and services revenue were driven by the contribution from Perot systems.
Public revenues in the quarter were $4.6 billion, up 20.6% from the year-ago quarter. Services revenues, including the contribution from Perot systems more than doubled. This apart, the sales to healthcare customers were also strong, with flat revenues coming from the state and the local government departments.
Small and Medium Business revenues in the quarter were $3.5 billion, up 25.4% from the year-ago quarter. In this segment, the server, storage and client businesses posted double-digit growth, driven by improving demand and impressive business execution across different businesses.
Consumer Business revenues remained flat at $2.9 billion. The company is confident of developing businesses under this segment.
Total sales from the BRIC countries (Brazil, Russia, India and China) increased strongly by approximately 52.0%, and accounted for 12.0% of Dell’s overall revenue.
Operating Results
Gross margin in the quarter was 16.6%, below 18.7% reported in the second quarter of fiscal 2010, and 16.6% reported in the previous quarter. The challenging dynamics in the company’s supply chain costs had a negative impact on gross margins and consumer profitability.
In addition, operating expenses as a percentage of revenues decreased 1.7% from the year-ago quarter. This resulted in an operating margin of 4.8%, up 1.3% on a sequential basis, but down 40 basis points year over year. Operating income declined as a result of a year-over-year increase in the sales, general and administrative as well as research and development expenses, while the same expenses declined on a sequential basis.
GAAP earnings during the quarter were $0.28 per share, up from $0.24 reported in the year-ago quarter and from $0.17 reported in the previous quarter. Excluding special items like amortization of intangibles, severance and facility action cost, acquisition related cost, and adjustment for income taxes, the EPS in the quarter was $0.32, up from $0.29 in the year-ago quarter and from $0.30 in the previous quarter.
Balance Sheet & Cash Flow
Dell’s cash conversion cycle remained unchanged from the previous quarter at a negative 36 days. Cash flow from operations increased to $1.33 billion from $238.0 million reported in the previous quarter. The substantial increase in cash flow was on account of seasonal factors, as during the previous quarter cash flow declined substantially for the same reason.
The company ended the quarter with $12.4 billion in cash and short-term investments versus $10.9 billion in the previous quarter. Long-term debt stood at $3.62 billion at the end of the quarter versus $3.58 billion in the previous quarter.
Guidance
Dell believes that demand will continue to increase over the next several quarters, especially from corporate customers. The company reiterated its full fiscal year outlook provided in the previous quarter, anticipating revenue growth from 14.0% to 19.0% and non-GAAP operating income growth between 18.0% and 23.0%.
To summarize, Dell reported decent second quarter numbers, with EPS and revenues moving up from the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, the smartphone initiative and a revival in IT spending were the quarter’s positives. Additionally, the acquisition of Perot Systems also expanded the customer base and opened up cross-selling opportunities.
However, the high level of debt and increasing competition from the likes of Hewlett-Packard (HPQ) and Acer are a cause for concern.
Consequently, we maintain a Neutral rating on the stock, with a short-term Zacks #3 Rank (Hold).
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Revenues for the second quarter of fiscal 2011 were $15.5 billion, up 21.7% from $12.8 billion reported in the year-ago quarter and up 4.4% from $14.9 billion reported in the previous quarter. The company’s second quarter revenue growth may be attributed to strength across all business segments (other than consumer) and to the integration of the financials from the recently acquired Perot Systems.
Additionally, the strong global commercial demand, specifically in servers and networking storage and services, also had a positive impact on the results of the company.
Revenue by Segment
Large Enterprise posted revenues of $4.5 billion, an increase of 38. 5% year over year. This growth is mainly attributable to a 34.7% increase in server revenues and a 57. 2% increase in services revenue. Server revenues were fueled by the rapid growth in blades, and services revenue were driven by the contribution from Perot systems.
Public revenues in the quarter were $4.6 billion, up 20.6% from the year-ago quarter. Services revenues, including the contribution from Perot systems more than doubled. This apart, the sales to healthcare customers were also strong, with flat revenues coming from the state and the local government departments.
Small and Medium Business revenues in the quarter were $3.5 billion, up 25.4% from the year-ago quarter. In this segment, the server, storage and client businesses posted double-digit growth, driven by improving demand and impressive business execution across different businesses.
Consumer Business revenues remained flat at $2.9 billion. The company is confident of developing businesses under this segment.
Total sales from the BRIC countries (Brazil, Russia, India and China) increased strongly by approximately 52.0%, and accounted for 12.0% of Dell’s overall revenue.
Operating Results
Gross margin in the quarter was 16.6%, below 18.7% reported in the second quarter of fiscal 2010, and 16.6% reported in the previous quarter. The challenging dynamics in the company’s supply chain costs had a negative impact on gross margins and consumer profitability.
In addition, operating expenses as a percentage of revenues decreased 1.7% from the year-ago quarter. This resulted in an operating margin of 4.8%, up 1.3% on a sequential basis, but down 40 basis points year over year. Operating income declined as a result of a year-over-year increase in the sales, general and administrative as well as research and development expenses, while the same expenses declined on a sequential basis.
GAAP earnings during the quarter were $0.28 per share, up from $0.24 reported in the year-ago quarter and from $0.17 reported in the previous quarter. Excluding special items like amortization of intangibles, severance and facility action cost, acquisition related cost, and adjustment for income taxes, the EPS in the quarter was $0.32, up from $0.29 in the year-ago quarter and from $0.30 in the previous quarter.
Balance Sheet & Cash Flow
Dell’s cash conversion cycle remained unchanged from the previous quarter at a negative 36 days. Cash flow from operations increased to $1.33 billion from $238.0 million reported in the previous quarter. The substantial increase in cash flow was on account of seasonal factors, as during the previous quarter cash flow declined substantially for the same reason.
The company ended the quarter with $12.4 billion in cash and short-term investments versus $10.9 billion in the previous quarter. Long-term debt stood at $3.62 billion at the end of the quarter versus $3.58 billion in the previous quarter.
Guidance
Dell believes that demand will continue to increase over the next several quarters, especially from corporate customers. The company reiterated its full fiscal year outlook provided in the previous quarter, anticipating revenue growth from 14.0% to 19.0% and non-GAAP operating income growth between 18.0% and 23.0%.
To summarize, Dell reported decent second quarter numbers, with EPS and revenues moving up from the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, the smartphone initiative and a revival in IT spending were the quarter’s positives. Additionally, the acquisition of Perot Systems also expanded the customer base and opened up cross-selling opportunities.
However, the high level of debt and increasing competition from the likes of Hewlett-Packard (HPQ) and Acer are a cause for concern.
Consequently, we maintain a Neutral rating on the stock, with a short-term Zacks #3 Rank (Hold).
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