Dell Focus on Enterprise Paying Off, Though Loses Ground in PCs
Dell (NASDAQ:DELL) reported flat revenues in its Q3 earnings citing that it chose not to participate in low-value opportunities which have put short-term pressure on revenue growth but have proven to be a real driver in expanding company’s margins. Dell, which recently ceded its position as the second largest PC vendor in the world to Lenovo, focused on growing its enterprise solutions and services business in an attempt to better compete against the likes HP (NYSE:HPQ) and IBM (NYSE:IBM).
Revenues down as Dell’s PC business suffers, Storage partnership with EMC ends
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Dell’s desktop revenue was down 6% and notebook revenue was down 2% as the firm faced multiple challenges in the PC market – rise of media tablets and increased competition from Lenovo.
Also, the company’s storage revenue declined 15%, while Dell-owned IP storage increased 23%, as the firm ended its long standing partnership with EMC to resell latter’s storage products. [1] On the flip side however, this resulted in significantly improved profitability at the company’s storage division.
One of the greatest fears Dell investor had while anticipating the earnings was the possible impact of the Thailand flooding on Dell’s Q4 outlook. (See Dell Q3 Earnings Tuesday: PC Biz Faces Strong Headwinds) Dell in its earnings acknowledged the situation and reduced full fiscal-year revenue growth outlook to 1% – 5%.
Gross margins up 310 basis points for the quarter will help Dell sustain profits
Dell managed to grow its gross margin by 310 basis points in Q3 as compared to the same period last year, in spite of flat revenues driven by disciplined pricing and focus on high-value products and solutions as well as greater contribution of enterprise services –which tend to have higher margin that products – to the company’s revenues. In fiscal 2012 so far, Dell has averaged gross margins over 22.5%, up significant from 18.5% in fiscal 2011.
Backed by strong margins, we expect Dell to maintain its profitability going forward even as revenues take a hit in short term.
We are updating our estimates on Dell, which will be onsite shortly and expect to be well ahead of market price.
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