Dell Maintaining Its Pace

Dell Inc. (DELL) reported third quarter fiscal 2011 earnings per share (EPS) of 45 cents, exceeding the Zacks Consensus Estimate of 32 cents.

Revenues

Revenues for the third quarter of fiscal 2011 were $15.4 billion, up 19.0% from $12.9 billion reported in the year-ago quarter. The company’s third quarter revenue growth may be attributed to strength across all business segments, other than commercial and enterprise sectors.

Additionally, the company is making strategic progress in improving its consumer business but is still quite distant from its goal.

Revenue by Segments

Large Enterprise posted revenues of $4.3 billion, an increase of 27.0% year over year. Enterprise solutions and services revenue was $1.7 billion, a 25.0% increase, and client revenue increased 38.0%.

The company introduced new virtual integrated system (VIS) architecture and services that help customers transform new and existing technologies to open, cloud-like models, and unify heterogeneous data center assets into a more efficient common pool of resources.

Public revenues in the quarter were $4.4 billion, up 20.0% from the year-ago quarter. State and local government business in the U.S. represents approximately 9.0% of Dell’s Public business and less than 3.0% of its total revenue. This business improved 5.0% in the third quarter, with Dell making progress in the healthcare business.

Small and Medium Business revenues in the quarter were $3.7 billion, up 24.0% from the year-ago quarter. In this segment, the company introduced new Power Edge servers, Power Vault storage, and Power Connect networking solutions that help small and medium businesses affordably update technology infrastructures with easy integration and minimal downtime.

Consumer Business revenues increased 4.0% to $3.0 billion. The segment reached a break-even operating income in this segment, despite muted consumer demand.

Total sales from the BRIC countries (Brazil, Russia, India and China), which accounted for 13.0% of Dell’s overall revenue, increased strongly by approximately 30.0%, mainly due to a 55.0% increase in revenues from India.

Operating Results

Gross margin in the quarter was 19.4%, up from 17.3% reported in the third quarter of fiscal 2009 and 16.6% reported in the previous quarter. The gross margin expansion may be attributed to continued expansion in emerging markets and sustainable strength in its global commercial customers demand.

In addition, operating expenses, as a percentage of revenues, remained flat at 12.8% compared with the year-ago quarter. This resulted in an operating margin of 6.7%, up 1.9% on a sequential basis and 2.2% year over year. Operating income increased as a result of better execution, competitive pricing and cost control initiatives in a favorable component environment.

GAAP earnings during the quarter were 42 cents per share, up from 28 cents reported in the year-ago quarter and from 17 cents reported in the previous quarter. Excluding special items like amortization of intangibles, severance and facility action cost, acquisition related cost, and adjustments based on income taxes, the EPS was 45,cent up from 32 cent in the year-ago quarter and from 23 cent in the previous quarter.

Balance Sheet & Cash Flow

Dell’s cash conversion cycle changed from the previous quarter to a negative 32 days. Cash flow from operations decreased to $913.0 million from $801.0 million reported in the year-ago quarter.

The company ended the quarter with $13.4 billion in cash and short-term investments versus $12.4 billion in the previous quarter. Long-term debt stood at $3.16 billion at the end of the quarter versus $3.62 billion in the previous quarter.

Guidance

Dell believes that demand will continue to increase over the next several quarters, especially from corporate customers. The company reiterated its full-year revenue growth expectations of 14.0–19.0%, and non-GAAP operating income growth of 28.0% and 32.0% set earlier in the year.

To summarize, Dell reported decent third quarter numbers, with EPS and revenues moving up from the year-ago quarter. New products, a stronger services business, opportunities in the Electronic Medical Record sector, the smartphone initiative and a revival in IT spending were the achievements of the quarter. Additionally, the acquisition of Perot Systems also expanded the customer base and opened up cross-selling opportunities.

However, the high level of debt and increasing competition from Hewlett-Packard (HPQ) and Acer concern us.

Consequently, the company has a short-term Zacks Rank #3 (Hold Recommendation).

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