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.
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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).
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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.
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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.