Dell Inc. (DELL) delivered first quarter fiscal 2012 EPS of 55 cents, handily beating the Zacks Consensus Estimate of 43 cents.
Revenues
Revenues for the first quarter were $15.0 billion, up 1.0% from $14.9 billion reported in the year-ago quarter. Revenue growth was driven by an improvement in the company’s Enterprise Solutions and Services.
Moreover, the company also witnessed decent growth in several key areas this quarter like the Small and Medium Business, the Asia-Pacific and Japan, and the company’s Server business was particularly strong. The overall revenue remained below the company’s expectation, as Dell witnessed slower growth from its Consumer business and some weak sales in the Public sector.
Revenue by Segments
Large Enterprise posted revenue of $4.5 billion, up 5.0% year over year.The improvement in revenue was led by the ongoing hardware refresh. Client revenue was up 7.0% and server growth was up 6.0%. Overall, Client hardware revenues fell 2.0% to $8.0 billion, driven by weakness in Public and Consumer.
Public revenues in the quarter were $3.8 billion, down 2.0% from the year-ago quarter. The company continues to witness budget cuts, which dampened spending on the client refresh. However, budget cuts had the opposite effect on server consolidation, virtualization and efficient IT services, which can drive structural cost reduction for customers given the financial challenges they're facing.
Small and Medium Business revenues were $3.8 billion, up 7.0% from the year-ago quarter. Revenue was at the highest levels in the last 2 years, driven by strong demand across all product lines. Server and Storage revenues were up 19.0% and 7.0% respectively, while hardware revenue from the segment grew 1.0%.
Consumer Business revenues decreased 7.0% to $3.0 billion. The company is experiencing above average seasonality due to good demand for Dell's Sandy Bridge based offerings, which are now widely available, good consumer spending and a refreshed portfolio of XPS products.
Total sales from the BRIC countries (Brazil, Russia, India and China), which accounted for 27.0% of Dell’s quarterly revenue, increased strongly by approximately 18.0%.
Operating Results
Gross margin for the quarter was 22.9%, up from 16.9% reported in the first quarter of fiscal 2010 and 21.0% reported in the previous quarter. The gross margin expansion may be attributed to good supply chain execution, a shift in the company’s product mix to Dell IP and higher value products, and continued component cost declines. Pricing discipline also remains key for the company, and the company continues to eliminate low-margin businesses (mention the lower-margin businesses here).
In addition, operating expenses, as a percentage of revenue was 14.8% compared to 13.4% in the year-ago quarter. This resulted in an operating margin of 8.1%, up from 3.5% reported in the year-ago quarter. The company continues to focus on areas with accretive margins.
The quarter’s GAAP earnings were 49 cents per share, up from 17 cents 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, the EPS for the quarter was 55 cents, up from 30 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Dell’s cash conversion cycle changed from negative 31 days in the previous quarter to a negative 32 days. Cash flow from operations increased to $465.0 million from $238.0 million reported in the year-ago quarter. The company ended the quarter with $14.4 billion in cash and short-term investments versus $14.3 billion in the previous quarter. Long-term debt stood at $6.8 billion at the end of the quarter versus $5.1 billion in the previous quarter.
Guidance
Dell expects mid-single digit revenue growth in its second quarter and expects fiscal 2012 revenue growth of 5% – 9% and an increase in non-GAAP operating income growth to 12%-18%.
Our Take
Dell reported decent first quarter numbers, with earnings per share (EPS) and revenues moving up from the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, along with the introduction of Dell Streak were the achievements for the previous year.
Dell also 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 #3 Rank, implying a short-term Hold rating.
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