A Look Ahead at Dell’s Earnings

Dell, the PC maker that’s still in the process of turning itself into an enterprise IT company, reports quarterly earnings today after the markets close in New York. The consensus view of analysts calls for the company to report a per-share profit of 40 cents on sales of $13.9 billion.

One of those analysts is Chris Whitmore of Deutsche Bank Securities. With demand for personal computers still soft, he expects a tough quarter, where Dell reports sales that come in a little light of the Street view. “We believe the company’s top-line results this quarter were impacted by weak PC demand in Consumer, small and medium businesses and the Enterprise, partially offset by relative strength in the Federal and Public [sector] demand,” he wrote in a note to clients Wednesday. Also, Europe continues to be weak both for PCs and IT spending as a whole.

The good news, he says, may come in Dell’s profit margins. He expects gross margins to be 22 percent, and operating margins to be 6.6 percent, both down a point or two from the year-ago quarter. Dell’s long-term strategy is to rely less on low-margin PCs and to boost sales of things that carry a lot of Dell-owned intellectual property. Also, prices on commodity parts like hard drives have come down recently. That will make the top line a mixed bag of bad news and good news. “We expect revenue to miss, but mix to shift towards Dell’s higher margin infrastructure products,” he wrote.

In time, he expects Dell’s enterprise business to add $1 a share each year in per-share profits, some of which will come from the recently closed Quest Software acquisition, which at $2.4 billion is expected to add somewhere in the ballpark of a quarter billion dollars in annual revenue, but to dilute EPS by about two cents to three cents this quarter.