Dell Exceeds Expectations - Analyst Blog

(

) reported first quarter 2011 EPS of 30 cents, exceeding the Zacks Consensus Estimate of 26 cents.

Revenue for the quarter was $14.9 billion, up 21.0% from $12.3 billion reported in the year-ago quarter and almost flat compared to $14.9 billion reported in the previous quarter. The company’s first quarter revenue growth may be attributed to strength across all business segments.

Additionally, commercial customers increased the purchase of Dell’s open, capable and affordable enterprise solutions during the recently concluded quarter, contributing to the company’s revenue and shipment growth.

Large Enterprise posted revenues of $4.2 billion, an increase of 25.0% year over year. This increase is mainly attributable to a 61.0% increase in server revenue and a 44.0% increase in services revenue. Server revenue was fueled by increased choices for customers, with the introduction of the PowerEdge blade, rack-mount and tower servers, as well as enhancements to the Dell Lifecycle Controller and the Dell Management Console (DMC).

Public Segment revenues for the quarter were $3.9 billion, up 22.0% from the year-ago quarter. Services revenues, including the contribution from Perot systems more than doubled, as Dell remains the number one healthcare information technology service provider according to a Gartner report.

Small and Medium Business revenues for the quarter were $3.5 billion, up 19.0% from the year-ago quarter. Dell’s huge SMB customer base of around 10 million customers, coupled with 50,000 registered and certified partners, led to the revenue increase in this segment.

Consumer Business revenues grew 16.0% year over year to $3.2 billion, with shipments growing 20% year over year. Under this segment, revenues from consumer mobility products were up 26.0%, led by increased demand for online access across geographies.

Total sales from BRIC countries (Brazil, Russia, India and China) increased strongly by around 60.0%, with revenue from India increasing 90.0% and that from Brazil increasing 81.0%. China reported revenue growth of 44.0%.

Gross margin for the quarter was 16.9%, below the 17.6% reported in the first quarter of 2010, while moving up from 16.6% reported in the previous quarter. The consumer business was sequentially down due to seasonality, which was offset by the strong growth in the client business. However, mix was favorable to margins.

In addition, operating expenses as a percentage of revenue decreased 1.5% from the year-ago quarter. This resulted in an operating margin of 4.2%, moving up by 0.8% on both year-over-year and sequential bases. Operating income mainly increased as a result of a better operating performance in all of its Global business segments.

Earnings per share during the quarter were $0.22, up from $0.17 reported in the year-ago quarter and also up from $0.17 reported in the previous quarter. Excluding special items like amortization of intangibles, severance and facility action cost, acquisition related cost, legal settlement and adjustment of income taxes, the EPS for the quarter was $0.30, up from $0.25 reported in the year-ago quarter, and also up from $0.28 in the previous quarter.

Dell’s cash conversion cycle remained the same as in the previous quarter at a negative 36 days. Cash flow from operations declined to $238.0 million from $1.26 billion reported in the previous quarter. The decline in cash flow was on account of seasonality, since the consumer business dropped off sharply from the fourth quarter to the first.

The company ended the quarter with $10.9 billion in cash and short-term investments versus $11.0 billion in the previous quarter. Long-term debt stood at $3.58 billion at the end of the quarter versus $3.41 billion in the previous quarter, generating a debt to capitalization ratio of 37.4%, down from 37.7% reported in the previous quarter. The company repurchased stock worth $200.0 million during the quarter.

Dell did not provide any guidance for the second quarter, but is cautiously optimistic about improvement in corporate IT demand. This apart, the company continues to witness increase in Commercial demand in the first quarter and is optimistic about the trend continuing throughout the year.

On the other hand, due to seasonal effect the second and the first part of the third quarter generally witness slower demand from larger commercial customers in the U.S. and Europe. Therefore, the company expects low seasonal demand pickup in the second quarter.

To summarize, Dell reported strong first quarter numbers, with the EPS exceeding the Zacks consensus estimate and revenue moving up compared to the year-ago quarter. The EPS was also better than the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, the smart phone initiative and a revival in IT spending are positive factors. 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

(

) and Acer are of concern.

Consequently, we maintain a Neutral rating on the stock.