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. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  2. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  3. Term

    Why You Should Consider Investing In the Tech Industry

    The technology industry offers huge investment opportunities.
  4. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  7. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  8. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  9. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  10. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!