After Two Missed Quarters, Can Dell Make Investors Happy at Last?
Computing and IT giant Dell will report its quarterly earnings results today, after the markets close for trading in New York. Investors will get a look at the latest state of play at Dell on its path to transform itself from a PC-centric company to one that focuses more on enterprise hardware and services.
It has been a busy quarter. Dell won a $2.4 billion bidding war for Quest Software, and made a key hire to run the nascent software unit of which Quest will become a part. CEO Michael Dell has made no secret of the fact that he continues to be on the prowl for acquisitions.
Last quarter wasn’t so good. The company reported its second earnings miss in a row, and an outlook that was far bleaker than analysts expected. Since then, Dell shares have been trading below $13 a share. Dell closed at $12.56 yesterday, up 34 cents, or more than 2 percent.
So what are the analysts expecting today? Revenue that falls slightly short of expectations, but healthier profit margins. The consensus calls for Dell to report sales of $14.7 billion, and per-share earnings of 46 cents.
Generally speaking, demand at Dell’s enterprise businesses has probably held up a lot better than its PC business has, analyst Chris Whitmore of Deutsche Bank wrote in a note to clients yesterday. Companies are buying more stuff than consumers, and servers and storage equipment is more profitable than consumer-grade PCs, anyway. “Despite weak PC shipments, we believe Dell’s server and storage revenue was relatively healthy as Dell is off to a good start with the Romley transition,” he wrote, referring to the code name for the latest generation of Intel server chip. “As a result, we expect Revenue to miss due to soft PCs, but mix to shift towards Dell’s higher margin infrastructure products.”
Dell’s gross margin, an important indicator of overall profitability, will, at 22 percent, be more than a point lower than it was in the year-ago quarter, Whitmore says, but as cost-cutting measures and a shift in the overall mix of products sold becomes more profitable, he sees that improving. Better supplies of hard drives following last year’s shortage brought about by the flooding in Thailand have also helped, as has a relatively benign environment on the pricing of components like memory chips.
There’s still a way to go on the turnaround, Whitmore says. He expects Dell to pare back its earnings outlook for its fiscal year 2013 from $2.13 a share, as demand slackens ahead of the switch to Microsoft’s Windows 8, which should get into full swing later this year and into 2013. He says $1.85 a share is a more realistic profit for fiscal 2013.
The good news in PCs: About two-thirds of Dell’s existing corporate customers are still running Windows XP, meaning they’re long overdue for an upgrade.