Dell Inc. (DELL) delivered second quarter 2012 EPS of 54 cents, handily beating the Zacks Consensus Estimate of 49 cents.
Revenues
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 refined its strategy to focus on 3 solutions domains including next generation computing solutions and intelligent data management, services, security and cloud and end-user computing.
Revenue by Segments
Large Enterprise posted revenues of $4.6 billion, up 1.0% year over year. The improvement in revenue was led by strong demand for Servers and Services. Server and Services witnessed growth of 5.0% and 11.0%, respectively.
Public Revenue was $4.5 billion, up 18.0% on a sequential basis but down 3.0% year over year. Enterprise solutions and services revenue jumped 7.0% sequentially. Client product revenue increased 34.0% sequentially.
The Public segment experienced a typical seasonal upside in revenue, particularly in the Client business, which increased 34.0% on a sequential basis. Moreover, the sequential demand for Servers, Storage and Services also increased but was partly mitigated by continued weakness in Europe and the U.S. Federal business.
Small and Medium Business revenue grew 5.0% to $3.7 billion. Moreover, Server, Storage and Services recorded strong year-over-year growth as most of the remaining EMC Storage business shifted to Dell Technologies.
Consumer Business revenue spiked 1.0% to $2.9 billion, driven by strong growth in EMEA and APJ, partly offset by lower revenues from the Americas. The company is experiencing robust upside in this business given the shift in product mix from lower margin products in Retail business to high-margin products.
Operating Results
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 an ongoing shift to higher value Dell technologies products. During the quarter, the company continued to eliminate lower-margin businesses, thus shifting away from the company’s long-term growth target.
Operating income stood at $1.3 billion or 8.8% of revenues in the reported quarter, up 52.0% year over year. The Commercial segment contributed 10.5% of the operating income, representing a 280 basis point increase from the previous year. Interest and other expenses were $55.0 million, driven by approximately $70.0 million in quarterly interest, offset to a certain extent by investment income.
GAAP earnings in the quarter were 48 cents per share, up from 28 cents a share reported 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, EPS in the quarter was 54 cents, up from 32 cents per share in the year-ago quarter.
Balance Sheet & Cash Flow
Dell’s cash conversion cycle changed from negative 34 days in the previous quarter to negative 31 days. Cash flow from operations increased to $2.4 billion from $1.3 billion reported in the year-ago quarter. The company ended the quarter with $15.1 billion in cash and short-term investments versus $14.4 billion in the previous quarter.
Guidance
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%.
In the third quarter, Dell expects to revenues to remain relatively flat with the prior-quarter level based on the seasonality over the past two years.
Our Take
Dell reported decent second quarter results, with earnings per share (EPS) and revenues increasing from the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, 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 the previously forecasted numbers.
Dell, however, benefited from the expanded customer base that resulted from the Perot acquisition. However, stiff competition from Hewlett-Packard Company (HPQ) and Acer concern us.
Dell holds a Zacks #2 Rank, implying a short-term Buy rating.
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