Based on the way things have been going for computer firm and technology services provider Dell (Nasdaq:DELL), a tough quarter was expected by many investors that follow the company. In this respect, the company delivered, but the fact remains that its results continue to disappoint.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Recent Results and Outlook
Dell was quick to point out that second quarter sales grew in its server, services and networking businesses. However, this actually covered two product categories and proved insufficient in offsetting declines in the other four. The worst performers were mobility and storage devices, which fell in the double digits. Desktop PCs and software both fell 9% and results in a total top-line decline of 8% to $14.5 billion.

Profits fell a more dramatic 13% to 42 cents per diluted share. Net income actually fell 18% to $732 million but share buybacks helped reduce shares outstanding by 6% and tempered the per-share results. Perhaps more worryingly, free cash flow fell dramatically to $517 million, which fell below reported net income and could indicate that Dell's days of throwing off prodigious amounts of discretionary cash flow are coming to an end. Net cash on the balance sheet is still quite ample at $11 billion, but has also been declining over time.

For the full year, analysts currently project a sales decline of nearly 7% and total sales about $58 billion. Prior to the earnings release, earnings expectations were at $1.91 per share but Dell said to now expect earnings of "at least" $1.70 per share. This figure is its estimate of recurring earnings and excludes a hit of a couple of cents from the purchase of Quest Software (Nasdaq:QSFT).

SEE: A Breakdown Of Stock Buybacks

Strategy
Chairman and CEO Michael Dell held fast to his belief that his firm is steadily "shifting the mix of our business to higher-margin enterprise solutions, led by solid growth in our server, networking, services, and Dell IP storage businesses." He did concede continued defeat in the PC business, but this could in fact be a short-term blip as customers could be holding off until the next version of Microsoft's (Nasdaq:MSFT) Windows operating system, which is slated for an October release.

The tough results for the second quarter certainly masked any indications that Dell's long-term strategy is working. One quarter is too short to make any firm conclusions, but lately the trends have seen computer weakness offset any benefits of diversifying into services and software. Archrival Hewlett-Packard (Nasdaq:HPQ) finds itself in a similar predicament these days.

For the time being, Dell is stuck in the middle. Low-cost producers such as Acer and Lenovo in Asia are winning on price, which used to be one of Dell's key competitive advantages. On the high end, consumers are more than willing to pay up for Apple's (Nasdaq:AAPL) iPad tablet and smartphones are becoming solid alternatives to bulky computers given their convenience, apps and increasing computing power.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
There is the potential for Dell to see a pop when the next version of Windows is released, but it will take a number of quarters of steady sales and profit growth for investors to warm up to the stock again. Paying a dividend could also help, though the cash flow trends may not currently support capacity for a high enough payout.

At the time of writing Ryan C. Fuhrmann was long shares of Microsoft since 2008 and HP since 2011.

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  3. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  4. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  5. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  6. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  7. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  10. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center