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Dell Inc. reported second-quarter 2014 non-GAAP earnings of 25 cents per share, which slivered past the Zacks Consensus Estimate by a penny. On a year-over-year basis, earnings slumped from 50 cents.

Revenues

Although revenues of $14.5 billion for the quarter remained flat on a year-over-year basis, it beat the Zacks Consensus Estimate of $14.1 billion. Sequentially, revenues increased 3%. The company reported year-over-year decline in product revenues (down 1%), which was offset by a 4% increase in the services revenues.

On the basis of operating segments, Dell’s Enterprise Solutions Group revenues increased 8% to $3.3 billion, primarily boosted by the 10% increase in its server and networking revenues and a 19.0% increase in Dell networking revenues. These increases more than offset the 7% decrease in Dell’s storage revenues.

Dell Services witnessed a revenue growth of 2.0% and reached $2.1 billion, primarily boosted by a 3.0% increase in Support and Deployment revenues and 5% revenue jump from infrastructure, cloud and security services, which more than offset the 6.0% decrease in revenues from Applications and Business Process services.

Dell Software generated revenues of $310.0 million. The End User Computing segment revenues were $9.1 billion, declining 5.0% on a year-over-year basis, primarily due to a 5.0% revenue decline in peripherals and third-party software revenues and 10% decline in mobility segment revenues. However, Dell desktop and thin client revenues were up a marginal 1%.

Operating Results

Dell’s non-GAAP gross profit was down 13.0% from the year-ago quarter to $2.84 billion and margins contracted 300 basis points (bps) to 19.6% on a year-over-year basis, primarily due to tepid revenue growth.

Non-GAAP operating expenses were up 4% from the year-ago quarter to $2.24 billion. As a percentage of revenues, operating expenses expanded 60 bps during the same period.

Increase in operating expenses negatively impacted operating income for the quarter. Operating income (non-GAAP) decreased 46% from the year-ago quarter to $602.0 million or 4.1% of revenues.

Dell’s non-GAAP (excluding amortization of intangibles, severance and facility consolidation cost, acquisition-related costs) net income came in at $433.0 million or 25 cents per share, which nearly halved from $875.0 million or 50 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

The company exited the quarter with cash and cash equivalents and short-term investments of $11.8 billion, up from $10.9 billion reported in the previous quarter. Dell’s long-term debt stood at $4.08 billion, down from $4.12 billion in the previous quarter. The company reported $1.68 billion in cash from operations.

Conclusion

Dell reported a tepid second quarter although it beat the Zacks Consensus Estimate on both fronts. Margins were negatively impacted by sluggish revenues and higher expenses. Moreover, due to the impending decision on privatization, the company did not provide any outlook.

Moreover, the company is up against cutthroat competition from Hewlett-Packard (HPQ - Analyst Report), low business growth in Europe and a restricted spending environment. The competition faced by the company in the Small & Medium Business (SMB) and server segments is also a concern.

However, Dell is exploring other markets and business segments. Moreover, the company is expanding its business across different geographical regions.

Currently, Dell has a Zacks Rank #3 (Hold). Investors can consider other stocks in the technology space such as SanDisk Corp (SNDK - Analyst Report) and Quantum Corp (QTM - Snapshot Report). Both the companies carry a Zacks Rank #1 (Strong Buy).

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