Dell’s Results Show Its Shifting Focus And Recovery Will Take Time

DELL: Dell logo

Dell (NASDAQ:DELL), which is going private, reported an 8% y-o-y drop in net revenues for FY13 at $56.9 billion. For the fourth quarter, Dell reported revenue of $14.3 billion, down 11% y-o-y, but 4% higher sequentially. It posted net income of $702 million, a 23% drop y-o-y, and reported non-GAAP earning per share of $0.40. The desktop PC and mobility businesses, saddled with weak macro-economic conditions and increasing competition, continued to drag on Dell revenues.

Dell’s enterprise solutions and services revenue rose 4% y-o-y to $9.4 billion while its server and networking revenue rose 18% y-o-y to $2.6 billion. Storage products revenue dropped 13% y-o-y to $434 million and software and peripherals revenue fell 11% y-o-y to $2.27 billion. The company continued to experience competitive pricing environment and budgetary issues with customers for its desktop and mobility deals, resulting in a 20% decline in revenues y-o-y. Dell declined to provide a forecast citing a definitive merger agreement to take Dell private. The company’s decision to steer clear of low-end PCs has resulted in improvement in gross margins. [1]

See our full analysis on Dell

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Acquisitions Spree And Changing Business Model Augur well for Dell

Dell has invested $5 billion in new capabilities and intellectual property in key assets such as Quest, SonicWall, Wyse and Appsure. These acquisitions led to a 40 basis points increase in selling, general and administrative expenses. R&D also grew primarily due to the acquisition of Quest in the quarter. These acquisitions have helped growth, particularly in the server and networking business that grew 18% q-o-q.

Some of the business model changes are already paying off with the servers and networking business doing well in the quarter. Dell’s server revenue rose 5% on the back of strong growth in the company’s hyper-scale data center solutions business and migration to the company’s 12th-generation servers. The 12G-server line, which commands premium in pricing and margins over previous generation servers, represents almost 80% of Dell PowerEdge server revenue.

Changes To Our Model

Our valuation is contingent of its performance in the services business and is based on the long term potential of its high margin businesses. We detailed our previous analysis here, but based on the current quarter filings, we update some revenue and cost drivers below.

1) Updated PC Market Share

According to the Dell’s historical PC share report, its market share in the desktop PC space has fallen from 14% to 12% currently and the portable PC market share has stayed flat at 10%. We have updated our analysis to reflect these numbers. We expect the PC market share to remain at these lower levels as the company will not go after low-margin, high volume PCs and will continue to concentrate on mid and high-end PCs. We expect the long term market share to fall to 5.5% for the desktop and notebook business.

2) Downside From Previous Estimate Driven by Increasing SG&A Expenses

Dell has entered into a whole slew of businesses via acquisitions. Dell is targeting key areas such as network security, cloud storage, systems management, business analytics, virtualization and thin client systems. The company expects security and systems management to be a billion dollar business in the next few years. SG&A expenses have increased nearly 40 bps on a y-o-y basis, and we currently estimate it to be around 14.2% of revenues. This is the most significant change for Dell’s cost drivers and is primarily responsible for the lowered valuation.

3) Dell Services Business Growing Slower Than Expected

The services business is a high margin business with margins nearly twice that of the product business. We estimate that the services business margin of about 34% and is potentially a high growth business. The business remained flat in FY2013, and this has led to lowered growth estimates in the short term.

4) Lower PC, Desktop and Server Gross Margins

We estimate that the gross margins will drop to around 15-16% by the end of the forecast period from its current level of 18% due to increasing commoditization of the hardware business.

We currently have a $12.44 Trefis price estimate for Dell.

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  1. Dell SEC Filing,, Feb 19, 2013 []