Market Overview

Dell Takes a Dive, and the Forecast Doesn't Look Much Better


Tuesday evening saw shares of Dell (NASDAQ: DELL) fall after the company reported dropping profit and a weaker-than-anticipated sales forecast.

According to the Wall Street Journal, the last check saw DELL down 5 percent, though the stock had risen over 24 percent since the start of 2012.

Dell reported a 4Q profit of $764 million, or 43 cents per share, compared to a profit of $927 million (48 cents per share) the previous year. As for revenue, that came in at $16.03 billion, which is up from $15.69 billion the previous year. The analysts were expecting a profit of 52 cents per share, but they came in at 51 cents per share.

Dell said in a statement that it expects revenue to drop approximately 7 percent more, leading to a forecast of $14.91 billion. That does not compare well with the analyst forecast of $15.09 billion.

Speaking on an earnings conference call, CFO Brian Gladden said that Enterprise Solutions and Services business now represents 30% of revenue and almost 50% of gross margin dollars. “While we're very pleased with our strategic progress and our total year financial results, we did expect to do a bit better. There were a few areas in the fourth quarter that negatively impacted our gross margins and I want to address those now. We called out the global hard drive situation as a challenge for the quarter, and while we were effective in shaping demand and pricing for hard drive cost increases, we were impacted by the available mix of drives. We prioritized high-end drives to relationship customers, resulting in a product mix that was less profitable than normal in consumer and our after point of sale hard drive business.”

Gladden also noted that Dell finds itself in a “mixed environment”, with sales declines in the public sector and consumer markets.

In its Tuesday research report, Deutsche Bank said that Dell's gross margins were light due to negative HDD impact (shortages hampered the ability to sell richer HE systems) and soft Public sector results. “We were surprised by the magnitude of the HDD impact given that HDDs are only ~10% of the PC bill-of-materials within a benign commodity environment. However, we estimate client GM% was down ~2ppts Q/Q. Looking forward, we expect multiple catalysts to support margins including: Romley server upgrade cycle, storage compares getting easier, easing HDD constraints and strong services contribution (backlog +11% Y/Y and revs +12% Y/Y).”

Jefferies stated that DELL management noted the weakness in GM was due to HDD-related issues, clearing $25M of smartphone inventory, and pressure in the U.S. Public business. Management said they were able to obtain enough HDDs but that after fulfilling enterprise contracts, not enough high-end HDDs were available, leading to a downward mix shift in their consumer PC business and hurting GM.

Sterne Agee was particularly surprised by the weakness of Dell's numbers, saying that there were two negative surprises. “(1) gross margin came in at 21.7%, a bit below consensus expectations closer to 22% and 23.1% posted last quarter and (2) its April quarter revenue guidance of a 7% Q/Q decline was a bit more tepid than expected.”

Posted-In: Deutsche Bank Jefferies Sterne AgeeEarnings News Analyst Ratings Tech Best of Benzinga


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